EP42 - Third Party Administrator's role in the ESOP...discussion. With Carla Klingler at Blue Ridge
[0:11] Welcome back this is the ESOP guy and we are on a journey to an ESOP and then this podcast and YouTube really is a resource that we've created to really help. Companies that are thinking they might want to go towards an employee stock ownership plan and so. With that you can find all of our episodes on journey to an ESOP.com so please check us out and. In tune into those to get more information about Employee Stock ownership plans so today I have the awesome opportunity to have Carla Klingler. From Blue Ridge and Associates on the podcast today she and her company are well-respected ESOP third party administrators. [0:50] And excited because we've been Carl and I've been talking about doing this podcast for a little while and I know she stays very busy so being able to do this before the end of the year is is great and I think it's. It's very timely to and I'll say this because I think a lot of companies are closing their Aesop's and the questions that they have are going to be answered in this podcast which is. Hey what do I do now that I've closed my ESOP and what do I have to do with you know with the third-party administrator so. With all that I wanted to kind of introduce a Carla to so Carla tell us a little bit about. Your background as it relates to esops how long you been doing this and just kind of how did you get involved with these Ops in the beginning. [1:31] Thanks for having me so much Phil I appreciate the opportunity as you said I'm a Blue Ridge now but I'm actually going into my 42nd year of East shopping so yes I was about 12 when I got into the end of summer wow that's great awesome, well seriously I was fresh out of college with a with a ba in economics and finance and absolutely no idea what I was going to do with that but my passion and stay focus was actually comparative economics and I had studied all the economic systems around the world pros and cons financial and social aspects of them hybrid systems Etc so the concept of a win-win-win the Aesop's offer it was very appealing from the onset of my career so the way it marries the financial benefits of capitalistic fiscal policies with generous sharing of wealth with those that help created, you know if I believed in that and I still do which is why I'm still doing it so well, that's something I didn't know because we have economics in common I was an economics major as well so it's kind of like with with an economics degree sometimes you're like I don't know what I'm gonna do you know in my career. [2:51] Because people like what you going to do for a job I don't know so but that's cool we all end up somewhere and so you know here we are. [2:58] Yeah that was exactly the questions I was asking myself back then so I just kind of walked into the ASAP World by accident there was a job offering at the you see placement center for a financial advisor. A company in San Francisco that's where I was living and had graduated from UC Santa Barbara so you know in my fresh youthful ignorance I thought I can do that and so I walked into the office of very young child mentee and told him I wanted to apply for that job so wow you stink yeah it is as things go he had already filled it with a. PhD applicant from Harvard someone far more qualified than me yeah but he said we're thinking about hiring another position, new focus in what we're doing and as it turned out I was the right person for that job and it was for new services that needed to be developed. Which happened to be Administration and compliance services. So that was my first job right out of college to develop those for ESOP companies which included building mathematical models programming them into software on very slow computers back then and Galloping efficient and compliant procedures for handling record-keeping, and compliance for ESOP companies so that's cool I actually should have asked you that question a long time ago because I didn't know where how you got into that that's great so I went to UC Davis by the way. [4:25] You do oh my gosh we have more in common than I even am I now so that's crazy so but Minke is a big name in Aesop's ouu starting that 42 years ago just means you totally are an expert because you've been doing this for such a long time, up until that point the legal services were pretty solidly in place but the admin was. Pretty pretty rudimentary and the existing rags and Arisa were basic and often pretty vague and open for interpretation. I mean think of all the guidance that we use today any sap Administration none of that existed at the time so there wasn't much to start with so we were truly making it up as we went along is it. I did have a privilege of working with the father of ESOP says the only thing this is there's one thing I wanted to tell you Louis Kelso I got to work with him a bit and what that is my gosh Theory seriously. [5:25] Yeah you work with kelsa yeah oh my giri economics wow that's insane you I can't believe you work for Kelso wow. Yeah I mean talk about some of the names like people are like when they read about Aesop's you're going to read about Kelso and you know that's fantastic that you have that in your in your background. [5:45] Well that with that was the that his theory was based binary economics was what it was called and I don't remember a lot of the details but I do remember that it married capital and labor you know in an ESOP, I'm putting so that was you know through hair through him and through everything that I learned from John and all of that I did I understood the intent. From that side of developing the administration services but there were some pretty interesting conversations with the Ways and Means Committee. During that time to regarding their intent for writing the regulations that affect Administration. You know the way they wrote it in Arisa 10 questions along the lines where we see how you wrote this staff but what your intent and how do you see it. Kind of streaming through the plan operations tell us what the record-keeping supposed to look like what ESOP record-keeping, just very interesting today to see that many of the procedures we did back then are still in existence today but when bad thing I do see today is that sometimes we get caught up in the details and the weeds of the compliance language and all the massive regulations that we have today that we kind of lose sight of. [6:59] The intent so I think our relationship with the DOL and the Outlook and their outlook on Aesop's could maybe be improved if we go back to understanding thoroughly the intent of that guidance so yeah yeah opinion no I think that's but you have a strong make a good place to make an opinion because you were there when it was all being created so I think that's pretty pretty cool. A pretty cool background so you fast forward you've been with Blue Ridge for how many years. [7:28] I've been with Blue Ridge for three years but out of out of the whole time in my career you know I was with what I was I had my own for a start pension group 4 guy's head that for 17 years and we were just a small boutique you know that offered purely ESOP Administration services so the I'm very pleased to be with Blue Ridge where we can offer all of the all of the peripheral services at Eastside need the ease of companies the now besides the administration the repurchase and the oh yeah. And I love you know all those things that ESOP companies need all of which have been evolving over all of these years so very interesting yeah it does help when you have a loom or resources to help your clients when you get down to it because it because some of that stuff as time goes on gets somewhat complicated, and you don't want to have to be doing everything you know to have people do different things in the company obviously helps. So so and Blue Ridge is a third-party administrator for people that listen to this podcast some of them don't really even understand like. The way the esops are going to be regulated so we're going to just kind of deal with some of the basic stuff at the front end just to make sure we're not we're not going to quickly you know with. With some of the stuff so so really the role that the TPA plays when it comes to the ESOP is what. [8:53] Well I like I always like to say we're kind of The Last Man Standing because we sent we're in the beginning of the transition. Pretty early on kind of behind the scenes but once everything is transitioned in the ESOP is in place the TPA take takes on the role of day-to-day advisor to and consultant to the ESOP companies we take all of the records we do the record-keeping we prepare the statements May file the corporate tax returns I'm sorry not the corporate tax returns we file a plan tax returns by the 55 hundreds and all of that and kind of close out the year and then we are often instrumental in. [9:41] Communicating helping the company to communicate that information to the plot to the participants so we take it we take it from there and then do the administration annually so some companies do it more and more frequently than annually they might do a quarterly but most d-sub companies do it anally so that's that's our main role. There's a lot of things in in that you know to determining how many shares are released in all of that it gets pretty complicated but that's our main role yeah. So yeah and so basically for an ESOP for a new company that's becoming an ESOP. They're going to have the participants are the employees and each employee is going to get some number of shares each year based on the way that the plan has been designed. Primarily that's going to be based on the the note between the ESOP and the company. And that notes going to have us a certain length of time so that could be 20 years 30 years. And then over that period of time every year there's going to be an allocation of shares that are released so. Again essentially what Carla says true the TPA basically captures all that data and make sure it's accurate and make sure that the make sure the employees. [10:52] Which are called participants make sure they have the right number of shares and so so with that let me let me come into something that always comes up with with conversations with. You know and I spend so much time with people that are not ESOP so-so. We get into this conversation while my 401k is is doing it this way and I have a 401k administrator's. Let's talk a little bit about the difference between a 40 and jtpa and and I'd like a. Straight up ESOP TPA where they just focus you know I know you guys do everything but with a primarily have the expertise. Is that get confusing for some people when you deal with you know becoming their TPA in terms of that the difference between 401K administrator's it does but even even within our own organization we definitely have a breakdown we have an ESOP team and a 401k team because the expertise needed for those plans is very very different and it takes a lot of time and energy and years. Typically to really gain the skills that you need to be the best Record Keeper in consultant on those types of plans the skills are just different so it's hard to be you can know a lot about it information and one thing that we do well is our team's work together well to pull all the skills into a good you know coherent and smooth. [12:21] Annual reports and in Communications and things like that so they took the team's talk to each other but the skills required are very different so you know as I said we have a so MIT massive regulations that govern both esops and 401k plan in the simple answer to what you just asked is that it really is impossible for anyone to know everything about everything so since they're different animals the intent of the laws that affect the two types of plans are different so and I always thought it was kind of interesting that these apps are actually born. [12:59] For 401 k plans irisa you know he stops came out of a race in 1974 and then the Revenue Act 278 is where the 401K as we know it, I was really born so the fact that it came out a different regulations is going to mean that the focus for providing the services are going to be very different so for me being a good ESOP Record Keeper and being a good ESOP consultant our key to being a very valuable resource to ESOP companies operate the smooth operation and success of a 401 k plan are typically driven by a bully participation in the investment funds and that kind of thing you know offering of their own money and all of that. [13:47] In this 401k plan is operate fairly consistently from company to company so deficient record-keeping system to ensure accuracy and compliance is very important but for Aesop's it in 401k. Service providers that it's not really necessary for them to understand how plans sponsor conducts their business or how employee productivity engagement affect the bottom line profit. But for ESAT says things are very important to understand because the more you understand about the global internal workings of any sub company the better consultant it can be because you need to know. And be able to explain and be able to predict and advise the company about how everything that happens at a company affects the east side. So you've got the human elements they're building and growing the company things like. [14:41] Morale and culture productivity on the job so I think both types of plans need great record Keepers and great Consultants. But the knowledge and skills needed to do those things are very different. The sheer complexity of being a great ESOP consultant and infinite unique companies does require years of focus and dedication. Still learning how to be a really great business consultant not just on the topic of the East. [15:12] I think that makes a big difference oh I think so too I and it's and I would just say this going into it you know most of the time I've gone through a process with a company. We usually do not have the 401K administrator become the ESOP TPA and it's just because of that the differences in knowledge base. And I like what you said Carly because I don't think I've ever thought about that they're actually two different regulations completely so you have to basically be schooled in both of those. But but ESOP does have as we get we're going to get into it they have a lot of other aspects of compliance that are going to be really important to be on top of. So going into that I mean like I guess one of the things I'll tell you to I and I'll just kind of make a comment too. One of the things I see a lot of is in the planning side, we do talk a lot about the match when we have a 401k account and do we suspend the match in what we mean by that is do we suspend the existing 401K match that's being done in lieu of now this new coming, ESOP contribution because essentially the contribution represents the company giving a benefit to the employees that they didn't have before and one of the main differences the ESOP that the employees don't pay for that sound like they're contributing out of their out of their own pocket to put that. Account together put money in their account a 401k you're putting money in and then the company matches that money so. [16:37] For me personally just professionally I do see a lot of times we we end up letting that 401k match go. You don't have to but we end up doing that you know quite a bit. Do you see that with what you do kind of you know with a lot of your types of clients and just as that a normal practice. [16:57] We do see that a lot and we do see the that we do see the 401K is obvious is always better from a moral perspective to not. Do away with anything if you can help it and so what we see a lot is just it we take it takes a lot of communications to set to show people that if you are doing away with it that they are getting something else in return something of value and something that you know has the potential to build. Well for them so the communications about it are important but a lot of times we also they don't necessarily do away with the match but they might do it decide to do it in stock and do it inside the ESOP so you may still have two separate plans but the match or even the Safe Harbor requirements for the 401K plan might be satisfied in the ESOP so these are some really good plan designs that we do see they've been around for a while but people haven't really used them I think they thought they were maybe. Complicated or they wouldn't be able to explain it but you know we're seeing those pain. [18:14] Great popularity these days so that you don't have to tell the employees that they are that you're doing away with their match or doing away with the or do away with us safe harbor you know right so they can still have the. That they might be looking too great so it's a way to keep it but still you know you're making that contribution to the ESOP anyway to satisfy the loan document so you can kind of give that part of that contribution double duty in satisfying the match or the Safe Harbor, okay makes sense right carving it out of the contributions there's a lot of creative. And very you know compliant and positive ways to do that these days. [18:58] That's great so so one of the things that gets into the beginning planning steps that I get into two is just breaking down in feasibility. Things that are we're going to reference as 40 44 15 40 9. And I thought it would be helpful just to kind of talk a little bit about those compliance requirements when it become when it when it comes to being an ESOP. Company because Blue Ridge in the blue the third-party minister is going to play a direct role in in helping to test those accurately and making sure that you. Don't have a problem with them so so let's go into each one separately but so 404 how would you explain 404 as a requirement for the ESOP. [19:35] I would explain 404 is being the deduction limits you've got several pieces to put together several different strategies you've got attack strategy you have transition strategy all of those things that have to fit together so one thing that you do want to do is make sure that all of the money as much of the money that you're putting into the ESOP. Is going to be tax deductible and is going to give you positive effects on your tax strategy overall so that's what 404 does it sets the limits for deductibility on the contributions to and that is typically an aggregate. [20:19] Limit where it takes into account all of your plans if you've got an ESOP and 401K you've got to look at the contributions to. To both plans to test their not the maximum deductions under 404. [20:33] And so the maximum deduction under 44 is 25% of the total payroll and what that means is that you can't. Exceed that in the way you create your plan and you know what so what happens if you do go over the 25%. [20:49] Well the toilet the 25% the 404 is has some different roles depending on whether you're a seat. [20:56] Or an S corp so that would be an important consideration when you're putting things together at the beginning is what you know what that strategy is going to be but in the 20 in the 25% for us to say for an S corp it is 25% that includes your, that includes your ESOP contribution and your any kind of 401k contributions employer contributions so. [21:30] That would include any matching or Safe Harbor contributions to the 401K and it would include all of your ESOP contributions so as an escort. If I exceed 25% of my of my allowed deduction. [21:46] Is it they just don't get the deduction or what what is the ramification of not being in compliance with that. [21:52] Well you don't you don't get the deduction but there are some rules there are some excess penalties if you do exceed those the there are typically what we call failsafe Provisions in the plan document that's if it does go over the floor well for a 4 you've really got to limit it to 404. If there are excess amounts you can carry them forward to the next year depending on the timing a lot of times they. And now a lot of times the contribution is actually made in the year following so you've got until the time to corporate tax returns are due which might be large April or even September you know for October for the with extensions you have until then to pay your contributions so if you go over the amount for the year that you actually put it in there then typically you want to re classify that. Is [22:57] Contribution for the current year and then you would offset whatever you were going to make for that year so that you're not ever going in excess of 40 for okay. And as I said it's yeah that makes sense and is a c-corporation what's what is the limit in a c-corporation. You can contribute 25% to the ASAP and then on top of that you can go up to 25% as a payment on the loan using the principal on the loan typically if you certain requirements are met you can you can also deduct the interest on top of. So that 25 plus 25 so the contribution limits are pretty large in a c-corporation but you don't have. [23:50] That's probably one of the main tax advantages to a c-corporation in an S corporation however you know you've got the fact that it's a tax-exempt entity the trust is a tax-exempt entity say you would not have any taxes on if the ESOP is the sole shareholder so there's tax advantages too both and there are different limits under 404 for each type of company so all of that is very important in your initial planning absolutely so so kind of leading into that to I mean a lot of the things that we're talking Carl and I are talking about need to be identified very early in the process because it will dictate. [24:32] To you know the ESOP plan how how do you want to be you want to be an S corp or a c-corp. There's a lot of other considerations between an S and a sea like for instance 1042. That can only be done for a c-corporation which is the capital gains tax deferral and so. [24:49] Anyway so those are those are good it's a good overview of 404 and it's and it's definitely something that. That you want to look at very carefully and make sure that you know the way you've created your ESOP fits within the boundaries of that. So let's move on to 415 how would you explain for 15. I explained for 15 is it's in the in the regulations there are limits on how much a company can add 2 and participants account on an annual basis there's an again those limits also are in the aggregate they look at all the plans and all the different sources of contributions and forfeitures and additions to an the name of that is that the maximum annual additions to participants accounts 0415 includes all the amounts that we talked about under 404 which you know the employer contributions which I didn't say earlier but those do include principal and interest paid on a loan. A little leverage descent and under for 15 you've got all of those seem employer contributions including the principal and interest and then. [26:06] It also includes the any matching Safe Harbor employer discretionary and any other kind of defined contribution plans like the 401K it also includes the employee deferrals so that's where a lot of companies that's for the testing is very important from the beginning is to take a look at all of that because sometimes you might want to scale back a bit on the amount that employees can put in and they met, that may sound bad on the top end of that but if they're going to be getting money in the east side. That they don't have to put in themselves then that might not be a bad trade-off for them so you've got to look at all that from the beginning as well and make sure that not only is the design of the ESOP going to be in compliance but that the design of the 401 k plan is going to be taken into account as well, got makes sense so the so the 4:15 the way I understand is that yours if you've maxed out in your compensation so for each individual. [27:14] Then you're forfeiting a portion of the ESOP allocation is that kind of the way you would explain it yeah it is and again we've got what we call the failsafe, Provisions in the plan that say how any excess has will be taken into account some plans say if you go over the 415 that will be it'll be corrected in the 401K which means if you go over for 15 and the companies giving you more money than you can put in there without then you're going to get back some of your own money on the alternative it might say it's going to be. Satisfied in the east side and therefore if you put too much money into the 401K and you exceed the 415 limits then you will forfeit some of your ESOP money so those are all part of the initial plan design. [28:08] And things that you know would be determined at the beginning, as to how they would do it and again there may be other plan design issues that can be done as opposed to somebody for fitting money you know at one end or the other other maybe some plan design issues that would really help everyone and avoid those excesses so those are all part of the planning and the implementation of the Eastside yeah like stretching out the inside loan a little, farther you have lower resolutions so the the current rule 44 15 for highly compensated people is it two hundred eighty-five thousand dollars. [28:46] Oh my gosh I believe that we just got new numbers you know it moves with the cost of living that was what it was. I can look up what it what it was we literally just got those not too long ago so you have any green damn In My Memory yet yeah that's not important I think because just basically say this if somebody in your business is getting paid. Something around 285 plus then then you're going to want to be thinking about 4:15. [29:17] Crush right yeah you for 15 is really an issue at all times because you've got a lot of people. A lot of people who really are not considered highly compensated people it might be a second job so those people are putting as much of their paycheck into their 401K as possible so it might be. Pretty high percentage of their salary typically you can put in you know a hundred percent of your salary if the plan allows its 0415 is very important and it can really kind of trick you up and places that you would not, anticipated right now good good point very good point because I kind of just tend to think one person's working here and they're putting you know that's all they do and then they're putting some percentage of their. [30:03] In in the 401K all right so 49p disqualified persons to give me your best. [30:10] Definition I explain this all the time but it's curious to see how you how would you explain from an IP to people that don't know what that is, if I probably definitely don't get into as much detail as you need to but basically I just say it is 409 p is called the S Corp anti-abuse rules and what that does is it makes sure that the stock is allocated on a broad base as opposed to just being. In just a few accounts and again this goes back to the intent of those initial rules that I was talking about earlier in a Rissa the idea behind a Rissa is that everybody shares in the allocation of the ownership. And so of the shares and so 49p sometimes 49p really doesn't. Work as well as you would think it would in some companies that could be a really good employee owned company are we stripped it from doing it because they're just is too much concentration of the shares and that's what Paul and IP measures is the concentration of the shares across the employee base so. [31:26] You have certain individuals typically family and that kind of thing that the allocations to their accounts might be. [31:35] Restricted in order to comply with 409 pee violating Pro 9 p is not an option so this test has two in this test is different from all the other tests it has to be satisfied on every day of the year, not just at the year in like the other test so anything that you're ever going to do that's going to change the ownership structure in anyway and this includes using synthetic Equity as well as just outright shares of stock then the 49p test needs to be done done you know pre-emptive to anything any effect that that change might have so yeah so would you describe it how do you describe look I would add to it like this because again people don't when they first off let me just say this when anybody hears 40 44 15 to 49. They immediately are intimidated because we're using Code sections. [32:30] You know so so you kind of like just throw out the numbers for a second and like I think what you said it's a disqualified persons. It is 409 p is specific to S corporation so C corporations don't have to worry about it. [32:43] It's intended so that you don't have a concentration of ownership once you do the ESOP. So that the transition of one one person owning those Shares are multiple people owning those shares and selling on to the ESOP. Don't get back in concentrated into a small group of people so that there's truly a Equitable dispersion of shares to the employees because it's really retirement vehicle. [33:09] So in the ruling really is you can't any one person can't have more than 10% of the deemed ESOP shares so if I do a partial or 100% ESOP it's whatever those Shares are that are fully allocated. So not one person can have more than 10 and then a family group can't have more than 20 percent in aggregate so, so the first piece is let's look for anybody that might have because of their compensation levels. And the number of employees and also the amount of that we're releasing every year based on that inside loan how many how many how many shares are actually being released. In that allocation and So based on that those variables. If anybody has any more than 10 and then you basically you know tick off anybody that's a family member you group those in anybody if any family group has more than 20 percent. Then you have a disqualified persons and. [34:00] I always describe it as it's really really bad if that happens and you don't even want to come close to it so because it will blow up your ass you'll have excise tax and then the whole thing kind of unravel so I think the biggest thing is to point out these are and I think you pick this up when you talk through these things they are somewhat complicated. They're there but they're really not when you break them down and take a payroll census and you apply the rules and what I do in a feasibility study is aisle, I'll basically take what Blue Ridge will do in their documents and I'll just show the employees payroll census and I'll show the allocations and then people are like oh I get it. [34:41] And so and that's the biggest thing what this podcast is to is to help people not to be intimidated by these code sections. And and really get good advisers like if this is something that we want you to get advice on very early in the ESOP process. So because if you don't I mean say you have a foreign a problem and you get all the way through the whole he's up process you spent all this money on trustees and valuation firms and attorneys and suddenly you realize oh. [35:07] This isn't going to work that would be horrible you know so clearly and you being able to ask the questions hey we address these adequately this is really what this podcast is about as to help you maybe ask three questions so and keep in mind that the benefit of being an S corp ESOP is the fact that there that the profits you know are pastoring to a tax-exempt entity so you're looking at a great benefit on there's there's always going to be a price to pay for that you know in this in the these rules were not called you know anti-abuse rules for nothing that's right originally when, is the dll open the IRS opened up the possibility for 4S corpse to become Aesop's there were very small. [35:56] Person who would convert to an ESOP and then and they would become tax-free and they would become a tax-exempt entity through the trust and that was what the IRS and DOL said no that is not the intent of giving this benefit to good solid s corporations who truly want to grow their company and reward the employees that helped build it so that's a little background on that but that's why that's very important and why they don't really allow us to violate it and then figure out you know how to fix it exactly. So so I guess the last thing as we finish up you have a company that they we get all the way through the process. And then they're going to start now we're contemplating the post ESOP world so you guys come in. [36:44] And you kind of have this you know process of getting them up to speed, there's a lot to be thinking about what would it what would a normal timeline look like for a first-year ESOP that from a from a TPA standpoint like what you guys do. [36:59] Okay, well the actual timeline from the time the ESOP transaction closes to the time the first Administration takes place and then to the time that the plan is rolled out to participants and they get their first. [37:14] Is generally going to depend on the time of year that it's implemented I wish that there was a simpler answer to the question but it really is going to depend on. That time in most of the time the Estep administration's completed after the close of the first plan year so if the transition closes early in the year, then the company probably needs to decide how they're going to roll it out and educate the employees on what to. Because it could they're normally not going to see any statements until a few months after the end. That first year so technically it could be a year from the time to transition occurs till the time they see their statement so how do you make that meaningful to newest at participants and that would be something, you know that would be have to be determined and the timing worked out that way if it closes at the end of the year of the ESOP closes at the end of the year. Then it's a little easier to coordinate. Roll out with the first statements because those are usually prepared he like a few months following the transition so like right now like got deals closing 12:31 and so they could just give you a case study so I've got one that's closing 12:31 but will be will be effective dating the plan January first 2021. [38:30] So we're going to have an allocation. [38:33] This year even though we're praising this year and so then we finish the year we signed all the documents we finished the year and then we go into January. Um and then basically from there. What happens with you guys too so assuming we're going to have a January one effective date 2021 we're ready to go right. [38:54] Right right you well once the you know typically it does go back retroactively and under the pandemic relief that we've you know had the last few years. We've seen some plans go back wrote directly to last year so the timing can get a little bit tricky, so in several things need to be coordinated and planned but closing the transaction is really when where the company where the trust it becomes the owner of the stock and that's where the participants interest actually begin so we're looking at a few things looking out when the plan went in if it was the beginning of the year basically what that says is that they get thinking of benefit for the whole year right and so that's the significance of going having a retro. Date for implementation of the ESOP itself but closing is really the key date that we want to tie things into in terms of rolling it out to participants and their statement coordinating the statements and so determining when the timing and the agenda of the rollout meeting are pretty, important one thing that I think is not really talked about a whole lot but once the. [40:22] Once the plan close and let's just say we're talking about the case that you're talking about now where they're just now doing it typically we're going to have a price there is a there's a. There's a transaction price in an ESOP transition and there's a post transaction price and so what we always want to look at in terms of what the participants are going to see and what you're going to communicate to them is the post transaction price there's really no need to get into all of the details of the transaction and the and the value before the transaction because it doesn't really affect them they become beneficiary owners at the time the ESOP, close it at the transaction closes in those shares become the property of the trust so. [41:12] There needs to be some planning there at that Point as to how with the context and the timing of the first statement is going to be and how that's going to flow to the second statement and then the next and the next what it's going to look like so and some participant statements that I see are actually had more cash flow statements and they need to be the intent again that word on the statements is to Simply show them how many shares are allocated to their account and the change in their value not necessarily the cash flow of the trust or the details of some of those complicated strategies how the internal loan works so anyway the timing is going to be once the closes and once you know the post transaction stock price at that point, being this close to the year-end you close a transaction now then the price should be set as of the end of the year and that's automatically going to be the post transaction stock price once that comes in then we're ready to go we're ready to finalize the. [42:24] Reports the finish up the internal Administration and compliance and prepare the statements showing them at that point that's when we can apply the payments that occurred to the loan during the closing as well as any. [42:43] The crude contributions for the year. And how the those amounts are used to repay the loan and release the shares and so what they would see on their statement or those release shares beginning at the post the post transaction right because transaction price yeah which is basically you'd as at the end of the year so let me just say here's probably gonna be the same but it might be different for other years it would be different if it happened earlier in the year yeah I would just say like when you say post transaction price just basically just say that the we have a day one and a day to price and the day one price is what we negotiated the ESOP for. The day to prices after the company has been leveraged with all this debt on the balance sheet the value goes from here down and that day to prices what we're establishing as the beginning, value when we go into the next and when we go into the plan year then then you guys I think the biggest thing is you communicate to the employees through these participants. [43:45] And those are when those come out that's really the timing of like making sure your employees when you communicate the ESOP making sure that they have the correct information and you guys have enough time to do the work that you do to make sure that that's accurate. And it's in it makes sense but my experience is it takes a couple plan years for for the employees to actually start to understand. Really because what they're going to see in the first plan year with those participant statements is hey this is how many shares I got. [44:15] And they don't really understand the connection between you know I'm going to get this many next year I'm going to get this many next year and then the value of those are going to start going up. And then in the second year they're going to start Co I can I could see now the trend here is the benefit to me being an employee so. And I think that it and I wanted to end with that because I think it's important because a good TPA as blue as blue ridge's. Well can it make sure that that's done correctly and we want to communicate everything to the employees. Accurately and clearly and make sure that there's no questions about you know. How does this work and so they're not there's no confusion so that's kind of where I was going to go with that. [44:57] In timing is very tricky and that's why you you know you can we say it's all done and then we just do this the one that the first statements and roll that out you really it's not that simple you've really gotta look at it and look at how that's going to look rolling forward so that you can get a whole plan of action as to how you are educating them along the way from day one and then being able to continue on a consistent basis because it consistency is the most important thing once you get a timeline going the you know the you need to be consistent for for the participants to really build the faith in it that you want them to have yeah that's that's the ultimate thing so so with all that Carla thank you so much it was really a lot of information we covered a lot of ground I hope it will be very helpful for people as they go back and listen. Um so thank you for your time today and doing that thank you I enjoyed it very much awesome so with that what's that. [46:04] I said hopefully it helps people you know who are looking at it and no you know what a wonderful thing in a win-win-win ESOP can be when it's done right so absolutely all right. So with that thanks everybody for tuning in and we'll see you on our next step on this journey to an ESOP.
All content © 2022 The Journey to an ESOP.