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New PPP Guidance Clarifies Affiliation Rules If a Business Sponsors an ESOP

The Paycheck Protection Program and Health Care Enhancement Act (the “PPP/HCE Act”), signed into law on April 24, 2020, clarified how the affiliation rules apply to businesses that sponsor employee stock ownership plans (“ESOPs”). According to the PPP/HCE Act, for purposes of the Paycheck Protection Program, a business’s participation in an ESOP will not result in an affiliation between the business and the ESOP (or with the participants in the ESOP). A copy of the PPE/HCE Act can be found here.

Supreme Court Vacates and Remands IBM Stock Drop Case

In a per curiam opinion, the U.S. Supreme Court vacated the decision of the U.S. Circuit Court of Appeals for the Second Circuit in favor of a group of IBM retirement plan participants who alleged that IBM, in its capacity as plan sponsor of the IBM Company Stock Fund (which is an ESOP governed by ERISA), breached its duty to prudently manage the ESOP’s assets. The participants alleged that IBM had a duty to disclose enormous losses being incurred by its microelectronics business and that the company’s failure to disclose such losses resulted in an artificially high stock price, which dropped significantly once those losses were eventually disclosed (see our prior blog post on the Second Circuit’s opinion here). In its opinion, the Supreme Court remanded the case back to the Second Circuit so that court could consider new arguments briefed by IBM in its appeal to the Supreme Court… Continue Reading

Second Circuit Allows “Stock-Drop” Case Against IBM to Proceed

In the recent case of Jander v. Retirement Plans Committee of IBM, the U.S. Circuit Court of Appeals for the Second Circuit ruled in favor of a group of IBM retirement plan participants who alleged that plan fiduciaries had breached their duty to prudently manage the assets of the IBM Company Stock Fund, an ESOP governed by ERISA. The case was filed after IBM’s stock price declined by more than $12 per share in 2014, following an announcement that IBM would pay $1.5 billion to offload its struggling microelectronics business. Plaintiffs alleged that IBM failed to publicly disclose enormous losses being incurred by the microelectronics business and had continued to report an inflated value for the business (which, in turn, resulted in an artificially high IBM stock price). The district court dismissed the suit, ruling that the plaintiffs had failed to state a duty-of-prudence claim under ERISA because a prudent… Continue Reading

Fifth Circuit Addresses ERISA Fiduciary Duty of Appointing Fiduciary to Monitor an Appointed Fiduciary

The U.S. Court of Appeals for the Fifth Circuit, which includes Texas, upheld a district court judgment that the former owner of a privately-held company engaged in a prohibited transaction and breached his fiduciary duties of loyalty and prudence when selling shares of company stock to his former company’s leveraged employee stock ownership plan (“ESOP”) at prices in excess of the stock’s fair market value. Specifically, the court found that the owner influenced the outcome of the appraiser’s valuation of the stock to achieve a higher stock price, which resulted in the ESOP overpaying for the stock. The Fifth Circuit disagreed with the district court’s holding that the owner, who was also a trustee of the ESOP, breached his fiduciary duty to monitor the other two plan trustees whom he had appointed and whom he knew had breached their duties of loyalty and care. Perez v. Bruister, No. 14-60811 (5th… Continue Reading

Operational Error if ESOP Allocated Shares Contrary to Loan Documents

Generally, shares in a leveraged ESOP may be released from the suspense account and allocated to participants’ accounts using a principal-only method or a principal and interest method. The IRS recently stated that, if an ESOP allocates shares using the principal-only method but the loan documents require the principal and interest method to be used, there is an operational failure and a prohibited transaction has occurred.  IRS Technical Advice Memorandum 201425019 can be found here.

IRS Issues Anti-Cutback Relief for ESOPs Eliminating In-Service Distributions

In Notice 2013-17, the IRS extended the deadline to amend an employee stock ownership plan (“ESOP”) to eliminate certain statutory in-service distributions as a diversification option that applies to an ESOP that does not hold publicly traded employer securities when the employer’s securities become publicly traded and to an ESOP that becomes subject to the diversification requirements that apply to ESOPs holding publicly traded employer securities. This guidance permits the change in the diversification rules and distribution rights without causing the ESOP to be in violation of the anti-cutback provisions of Section 411(d)(6) of the Internal Revenue Code. The prior deadline to so amend an ESOP was the deadline to amend under the Pension Protection Act (“PPA”). Pursuant to Notice 2013-17, the new deadline is the later of the PPA deadline or the last day of the first plan year starting on or after January 1, 2013. A copy of… Continue Reading

Presumption of Reasonableness Standard Does Not Apply at Pleading Stage and SEC Filings Incorporated by Reference in a Summary Plan Description are Fiduciary Communications

Plan participants sued claiming breach of fiduciary duty relating to an employee stock ownership plan (“ESOP”) offered as one investment option in the employer’s defined contribution, participant directed retirement plan.  The trial court dismissed the suit for failure to state a plausible claim for relief.  The 6th Circuit reversed the dismissal, holding that (1) the presumption of reasonableness standard applied to an ESOP fiduciary’s decision to remain invested in employer securities does not apply at the pleading stage and (2) SEC filings, when incorporated by reference into a Summary Plan Description (“SPD”), are a fiduciary communication under ERISA.  First, the court clarified that the presumption of reasonableness standard is not appropriately applied at the pleading stage because the presumption can be overcome “when applied to a fully developed evidentiary record.”  The court reasoned that while ERISA 404(a)(2) generally abrogates an ESOP fiduciary’s duty to diversify investments, the fiduciary is not… Continue Reading

ESOP Guidance Issued

The IRS issued guidance regarding when employer securities are readily tradable on an established securities market or established market. If an employer’s securities are not considered readily tradable, the employer’s ESOP must satisfy additional requirements, including requirements regarding voting rights, distribution rights, and valuations. The guidance clarifies that for purposes of these requirements, readily tradable on an established securities market means the security is traded on a (1) registered national securities exchange or (2) foreign national securities exchange supervised by a governmental authority and, generally, the security is included on the FTSE Group All-World Index. The guidance is effective for plan years beginning on or after January 1, 2012. For plans that have securities on a foreign exchange, the guidance is effective for plan years beginning on or after January 1, 2013. Taxpayers can rely on the guidance after March 14, 2011.

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