Age 55 Diversification

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Age 55 Diversification

• 18th Annual Ohio EmployeeOwnership Conference
• Presented by Dorn SwerdlinSwerdlin
  CompanyFriday, April 16, 2004

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What We Will Discuss

• Basic Rules
• Examples
• Timeline
• Election Forms
• Acting on Election
• Diversification Calculations
• Sticky Issues

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Basic Rules
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Age 55 Diversification

• Code Section 401(a)(28)(B)
• Allows participant to diversify out of company
  stock.

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Eligibility
10 years ofparticipationin plan
Age 55
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Stock Eligibility

• Shares of company stock acquired by trust after
  December 31, 1986
• May be allowed with respect to all shares

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Election Period

• 6 year period
• Begins when participant meets eligibility
  requirements

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Elections
Able to diversify 25 of qualifying shares
First 5Years
Final option to diversify up to50 of qualifying
shares
6th Year
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Computing Shares
-
Any shares that have been previouslydiversified
Total of allocationshares that haveever been
eligiblefordiversification
minus
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Exceptions

• Not required if shares in participants company
  stock account have a market value of 500 or less

lt
Market Value 500
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Timing of Elections

• Must be granted to participant within 90 days of
  close of plan year during which he meets
  requirements

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Implementation

• Within 90 days after the last day of the 90-day
  election period

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Alternatives

• Company may implement diversification elections
  by
• Making a distribution of the diversified shares
  or
• Providing at least 3 investment options within
  the ESOP (or another plan)

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Effective Date of ESOP January 1,
1980 Diversification OccursAge 55 and 10 years
of participation KL Corporation also sponsors a
401(k) Plan
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Leon Kelso Date of BirthJanuary 1, 1935 Date of
Participation January 1, 1995
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Diversification Procedures Timetable
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Diversification Timeline
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Election Forms
Preliminary 2004 Diversification Election Notice
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Election Forms
Final 2004 Diversification Election Notice
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Election Forms
Final 2009 Diversification Election Notice
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Acting On The Election

• Transfer to KL Corporation 401(k)
• Take Cash
• Taxed as ordinary income and subject to any
  applicable penalties
• Roll over to IRA
• Take Stock
• Put Option is available (closely held)

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Diversification Calculation
If the plan allows the participant to diversify
more than the number of shares required under the
Code, there are no provisions under the Code or
regulations allowing those shares to be deducted
from the amount available for diversification
during the qualified election period. However,
they must be included in determining the total
number of post 1986 shares allocated to the
participant's account.
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Sticky Issues
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Determining Years of Participation
1,000 hours ofservice withina 12-month period
General yearof servicedefinition
Active Employees

• Vesting 1,000 hours of service in a plan year
• Eligibility 1,000 hours during initial year of
  employment and anniversaries thereof or if
  fewer than 1,000 hours during initial year of
  employment, measurement period reverts to plan
  year

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Determining Years of Participation
What About Terminated With a Vested Account
Balance?

• Code is unclear
• Conservative approach As long as a terminated
  participant has a vested benefit remaining in the
  plan, he/she is considered to be a Participant
  under the Internal Revenue Code therefore, for
  each plan year that they have a vested balance,
  they have a year of participation for
  diversification purposes

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Determining Years of Participation
What Happens When Plans Merge?
Mergesexisting 401(k) intoESOP
Right AwayParticipants may have 10 years
ofparticipation if you include their years in
the 401(k) plan
Employer sets up new ESOP

• There is no clear guidance however, the
  conservative approach is to count years of
  participation from entry in the older plan.

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Determining Years of Participation

• Recommendation
• In both instances, draft documents to
  specifically define years of participation for
  diversification purposes.

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What About Reshuffling?

• Each participant has same proportion of shares
  and cash
• How do you keep track of shares?
• Administratively maintain separate buckets for
  post 1986 shares
• For qualifying participants, diversify within the
  plan and transfer diversified shares to cash
  investment
• Any other suggestions?

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Deadline Dilemmas

• How do you meet the 90 Day and 180 Day deadlines?
• Offer a preliminary diversification election form
  based on prior year information
• Upon completion of appraisal and allocation,
  provide a final election form based on final
  information

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Deadline Dilemmas

• What if you miss the deadline?
• Creates an operational error for the plan.
• Correct the problem so that the plan is in the
  same position it would have been had the error
  never occurred offer the participant the
  diversification right at the price that would
  have been paid when the election should have been
  made