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Meeting Your Congressional Representatives —Why It’s Important and How to Get StartedWritten by Alice H. Simons, MarketingManager – SES Advisors, Inc.

When the Employee Retirement Income Security Act (ERISA)

was enacted in 1974, the number of businesses taking advantage of new taxincentives for C corporation ESOPssteadily grew. Beginning January 1, 1998,the numbers increased again as S corporations were also now permitted to sponsor ESOP plans. The tax incentivesnot only benefit the sponsoring company,but also the selling shareholders and the employees. But what would happen to your company if these laws werechanged, or even revoked?

Congressional Advocacy – The Current IssuesAs an ESOP consulting firm and law firm — as well as an ESOP sponsor —SES and SFE&G strongly believe that we have a responsibility to ensure thatthese pro-ESOP laws are kept intact, if not expanded. Although we can play a large role in pro-ESOP legislative advocacy, the voices of ESOP companies

are even more critical. There are currentlytwo primary objectives of the ESOP advocacy efforts in Congress:

1. Ask your member of Congress to co-sponsor a pro-ESOP bill – H.R. 1244in the House, or S. 1512 in the Senate.

2. Educate your member of Congressabout the 2010 Department of Labor(DOL) proposal to make independentESOP appraisers fiduciaries of the plan,and the negative impact it would have on ESOP companies. Although this proposal was temporarily rescinded, the DOL has promised to issue a similarproposal this year.

On March 29, 2011, a bi-partisan groupof key members of the House Ways and Means Committee introduced H.R.1244, the “Promotion and Expansion of Private Employee Ownership Act of 2011.” The House Ways and Means is the chief tax-writing committee in the House of Representatives, and has jurisdiction over all taxation, tariffs and other revenue-raising measures. H.R. 1244 has four main objectives:

1. Permits owners of S stock to sell thestock to an ESOP and defer the capitalgains tax on the gain if the proceeds are reinvested in the equities of U.S. operating corporations (currently onlyowners of C stock can defer capital gains);

2. Permits lenders to S corporations with50% or more ESOP ownership to exclude50% of the interest from the loan if usedto acquire stock for the ESOP;

3. Establishes an office in the Departmentof Treasury to provide technical assistanceto S corporations with ESOPs; and

4. Provides that an S or C corporationsmall business that is eligible for one ofthe many programs provided by theSmall Business Administration can remain eligible for these programs if the company becomes majority-ownedby an ESOP and the workforce remainsthe same or nearly the same.

Currently, 15 members of the Committeehave signed on as co-sponsors of this resolution, along with 61 other membersof the House. (The Senate introduced a companion bill, S. 1512, on September

6, 2011.) To see a list of co-sponsors, see page 20 of The ESOP Association’sCongressional Company Visit Kit atwww.esopassociation.org/gov.

On October 22, 2010, the DOL issued a proposed regulation to make all appraisers of private ESOP companystock ERISA fiduciaries. This policy, ifconfirmed, would have reversed 34 yearsof DOL policy that valuators of ESOPstock were independent, and not ESOP fiduciaries. The negative impact on ESOPcompanies would have been significant,not only increasing the costs of establish-ing and maintaining an ESOP, but open-ing up the possibility of lawsuits againstappraisal firms and ESOP companies forfaulty valuations if share values declined.Fortunately, thanks to vigorous protestsby The ESOP Association and the ESOPcommunity through their Congressionalrepresentatives, that proposal is nowbeing revised, with a new proposal expected this year. However, there is concern that the new proposal will stillhave a provision that appraisers will be fiduciaries during any ESOP transaction(although not for regular annual appraisals). The ESOP community mustcontinue to be vigilant in contacting their members of Congress to make surethat our “ESOP advocates” are poised to rally against such a proposal.

How to Schedule a Visit withYour Member of CongressThere are two ways to meet with yourCongressperson – meeting at his/her office in D.C. or the District office, or

having him/her visit your company.

First, if you do not know who your HouseRepresentative is, go to www.house.govand type in your company’s zip code.Click on the name and it will bring you tohis/her website. Contact the D.C. office ifyou would like to visit there, or the localdistrict office if you would like him/her to visit your company. There may be ascheduling/meeting request form on thewebsite. If not, call the office and ask to speak to the scheduler. Ask for the scheduler’s direct email address so youmay send the details of your request. Youmay need to follow up several times, butbe persistent. If the Representative is notavailable, you will likely be able to at leastschedule a visit with one of his/her aides.You can also visit your Senators’ websites– there is most likely a scheduling requestform on those sites as well.

Preparing for the VisitThe most important information you cangive your member of Congress is aboutyour company. Talk about the positive financial and motivational results ofworking for an ESOP company, bothfrom a company as well as from a per-sonal perspective. Explain that employeeowners save more for retirement, howESOP companies have higher employeeretention and perform better than theirnon-ESOP counterparts, and keep jobs in the district.

Here is some convincing evidence youcan quote. A recent General Social Survey(GSS), funded primarily by the NationalScience Foundation and conducted by the

National Opinion Research Center at theUniversity of Chicago, found that 3% of employees with employee stock ownership (including the ESOP modeland other forms of employee ownership)were laid off in 2009-2010, compared to a 12% rate for employees without employee stock ownership. In addition,survey data indicated that 13% of the employees with employee stock owner-ship intended to leave their companies in the coming months, whereas the ratewas a much higher 24% for employeeswithout employee stock ownership. These findings show significantly higheremployee sustainability and job stabilitywith employee stock ownership – evenduring the Great Recession.

You should prepare a handout that in-cludes information about your company,ESOP facts and statistics, a copy of H.R.1244 (or S. 1512) and a statement aboutthe DOL proposal. Fortunately, TheESOP Association has already preparedeverything you need for a successful visit. The Congressional Company Visit kit referenced above has information onscheduling a visit, what to do during yourvisit, handout materials and follow up.

We are Here to HelpIt may seem like a daunting task, but we can help you through the process of making sure your members of Congressknow what your ESOP means to your company, your employees, the community and the economy. Contactme directly at (215) 508-5639 or asimons@sesadvisors.com to get started. �

Client Alert

Please join us for an ESOP Sustainability Client Symposium, hosted by SES Advisors and SFE&G. Look for your invitation in the mail.

Save the Date: October 24, 2012

Client Alert

Strategies for Utilizing Retained Profits in Mature ESOP Companies Written by: Brian Wurpts, Vice Presidentof ESOP Consulting – SES Advisors, Inc.

Upon repayment of a company’sESOP acquisition loans, most

mature ESOP companies naturally turntheir focus to repurchase obligation planning. They often obtain a repurchaseliability study which guides their boardsin considering appropriate benefit funding levels for future plan years. Thedifference between the funding need and the funding level is often addressedby utilizing some combination of dividend funding, stock redemptions and re-leverage transactions. The goalsof these strategies normally include: i) ensuring fairness in benefit levelsamong participants, both in terms of allocation fairness and avoiding the creation of two classes of participants(sometimes referred to as the “have/havenot problem”); and ii) ensuring adequatecapital and liquidity for the ESOP company to meet its obligation.

In order for these strategies to work, thecompany has to understand the impact of retained profits on both its stock valuation and on the participant accounts. In some cases, particularly in 100% ESOP-owned S Corporations, the tax benefits of an ESOP may cause a significant build up of cash on the company’s balance sheet. While manycompanies would not view this as a problem, it can cause distortions amongplan participant accounts, distort the costof future repurchase obligations, and maycause concerns for both the company andESOP fiduciaries if management of thecompany’s investment portfolio becomesmore relevant to the overall shareholderreturn than managing the core business.

Uses for Excess CapitalThere are several options for matureESOP companies to utilize their excesscapital. Among these options are:

� business acquisitions or mergers

� aggressive expansion of business operations

� modernization or upgrading of plant and equipment

� acquisition of real estate

� prefunding of the ESOP repurchase obligation through dividends or contributions (sometimes utilizing segregation or re-leveraging strategies)

� distribution of plan assets to participants

The balance of this article focuses on thislast option.

Case StudyOne of our ESOP clients approached ourconsulting group concerning options for freezing or terminating their ESOP.The company is an S Corporation that is substantially owned by its ESOP. Management was concerned that thecompany was building up excess cash on the company’s balance sheet. TheESOP trustees were concerned withwhether having the company hold substantial non-operating assets createdpotential fiduciary liability. Moreover,large ESOP account balances were having a detrimental effect on employee retention because some employees wereleaving the company in order to accesstheir ESOP accounts.

We reviewed the company’s valuation report and discussed it with the inde-pendent appraiser. The evaluation

made it clear that more and more of thecompany’s excess cash was likely to beadded to the company’s future valuation(essentially making future repurchase obligation more expensive). Up to thispoint, the appraiser had disregarded the excess cash because the company typically went through periods of substantial capital investment (e.g., replacing equipment, acquiring newequipment or expanding operations geographically). However, even thebuildup of cash was exceeding the company’s most aggressive capital expenditure budgets. This made the ideaof a company stock redemption and/ordividend payment an attractive option.

Next, we evaluated the benefit levels inthe ESOP and described several optionsfor the company, including freezing theplan, terminating the plan, re-leveragingand offering participants a special diversification opportunity. Managementand the ESOP trustees preferred to leavethe ESOP in place but wanted to movesome of the excess non-operating assetsoff the company’s balance sheet. Both the company and ESOP fiduciaries felt uncomfortable managing an investmentportfolio that made up such a large portion of the company’s value. More-over, the company expected significantgrowth in the underlying value of the operating company, and they didn’t wantthe return on the investment portfolio todilute the impact of improvements in thecompany’s enterprise value, nor did theywant employees to lose the connectionbetween their efforts as employee-ownersand their ESOP return.

We modeled several potential scenariosand mechanisms for redeeming a portion

of the ESOP’s stock or for using theESOP as a conduit for distributing excess capital. In this case, a companystock redemption made more sensethan large dividend payments. Uncertainty concerning future stockvaluations and the ESOP fiduciaries’ desire not to force any participant to divest of their company stock accountmade a voluntary diversification opportunity the obvious choice.

We devised a plan to offer a one-timediversification to all vested ESOP participants. The total offering amountwas fixed by the company at about 25 percent of the company’s assets in excess of working capital needs. Thisapproach allowed the company to accomplish its goals of moving a portion of its excess assets off the balance sheet and providing diversifica-tion and access to benefits to the ESOP participants, while minimizing transaction cost and complexity. The ESOP participants would have theopportunity to diversify a significantportion of their ESOP wealth.

The structure of the plan amendmentneeded to execute this offering wascomplicated by three factors:

1. The offering needed to be structuredin a way that didn’t favor highly compensated employees.

2. The redemption of a portion of the ESOP’s stock could not result in the ESOP failing an important compliance test [IRC Section 409(p)Anti-Abuse Test].

3. The ESOP sponsor needed to under-stand that this special diversificationdistribution would not mitigate the

statutory ESOP diversification obligation(i.e., for those participants who reach age55 and 10 years of participation).

Our plan administration, finance andlegal experts crafted a solution that metthe company’s goals without creatingcompliance problems. We modeled thedistribution offer to ensure that it wasnot discriminatory (i.e., that the balanceof highly and non-highly compensatedindividuals would result in the planamendment being discriminatory). We also projected the IRC Section409(p) Anti-Abuse test results on a full range of participation levels and developed contingency plans if the participation rate would have caused a failing result. Attorneys at SFE&Gcrafted a plan amendment and participant disclosures that would ensure the participants had sufficientinformation to make an informed decision about participating in thisoffer. Finally, we updated the company’srepurchase obligation study to projectthe impact of this offer on the repur-chase obligation and the company’sability to meet future obligations.

The special diversification offer was well received by ESOP participants.Eighty percent of the eligible participantselected to participate. The participantswere able to diversify and/or access approximately 15 percent of their ESOPbenefits. The ESOP sponsor feels thatthis program has made the excess capitalmore manageable and has reduced thelikelihood of long term participants leaving the company in order to accesstheir benefits. �

Contact Brian at bwurpts@sesadvisors.com

Client Alert

SES Advisors and SFE&G are pleased to welcome W. Terence (Terry) Jones toour team. Terry will headSFE&G’s new office in Boston,MA and serve as Co-ManagingShareholder of SFE&G withTabitha Croscut.

Terry brings more than 30years of experience in employee benefits, ERISA,ESOPs, corporate law, business succession andmergers and acquisitions toour national ESOP practice.

Learn more at www.sesadvisors.com.

PENNSYLVANIA SES (215) 508-1600, SFE&G (215) 508-1500 | NEW JERSEY SES (973) 540-9200, SFE&G (973) 540-9292

RHODE ISLAND SFE&G (401) 632-0480 | VIRGINIA SES (757) 442–6651, (434) 202-1221 | ILLINOIS SES (847) 220-0549

INDIANA SES (219) 548-3696 | TEXAS SES OF TX (817) 712-2363 | NEW YORK SES (585) 385-0819 | MASSACHUSETTS SFE&G (617) 310-6565

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