X.89 ESOPs may be terminated for a number of reasons, such as when a change in control of
the employer occurs; company management concludes that the ESOP is no longer appropriate; the employer stock no longer satisfies the definition of a qualifying employer security as required under the law; or the employer encounters financial difficulties. The ESOP termination process is described in paragraph A-49 of appendix A of this chapter. FASB ASC 962-40 provides guidance for terminating defined contribution plans.
X.90 If the liquidation of a plan is deemed to be imminent (as defined in “Pending Content” in
FASB ASC 205-30-25-2 Presentation of Financial Statements–Liquidation Basis of Accounting) before the end of the plan year, the plan’s year-end financial statements should be prepared using the liquidation basis of accounting. “Pending Content” in FASB ASC 205-30-25-2 states that liquidation is imminent when either of the following occurs:
a. A plan for liquidation has been approved by the person or persons with the authority to make such a plan effective, and the likelihood is remote that any of the following will occur:
2. The entity will return from liquidation
b. A plan for liquidation is imposed by other forces (for example, involuntary bankruptcy), and the likelihood is remote that the entity will return from liquidation.
X.91 “Pending Content” in FASB ASC 205-30 requires financial statements prepared using the
liquidation basis of accounting to present relevant information about an entity’s expected resources in liquidation by measuring and presenting assets at the amount of the expected cash proceeds from liquidation. The entity should include in its presentation of assets any items it had not previously recognized under U.S. GAAP but that it expects to either sell in liquidation or use in settling liabilities.
X.92 In accordance with “Pending Content” in FASB ASC 205-30, the entity should recognize
and measure its liabilities in accordance with GAAP that otherwise applies to those liabilities. The entity should not anticipate that it will be legally released from being the primary obligor under those liabilities, either judicially or by creditor(s). The entity also is required to accrue and separately present the costs that it expects to incur and the income that it expects to earn during the expected duration of the liquidation, including any costs associated with sale or settlement of those assets and liabilities. Additionally, “Pending Content” in FASB ASC 205-30-25 requires disclosure about an entity’s plan for liquidation, the methods and significant assumptions used to measure assets and liabilities, the type and amount of costs and income accrued, and the expected duration of the liquidation process.
Note
“Pending Content” in FASB ASC 205-30 is effective for entities that determine
liquidation is imminent during annual reporting periods beginning on or after December 15, 2013, and interim reporting periods therein. Entities should apply the requirements prospectively from the day that liquidation becomes imminent. Early adoption is
permitted. However, plans that are already using the liquidation basis of accounting as of the effective date are not required to apply the “Pending Content” in FASB ASC 205-30. Instead, those plans should continue to apply the guidance in FASB ASC 962-40-25 until they have completed liquidation.
The AICPA Employee Benefit Plans Expert Panel developed Q&A section 6931.18–.30 (AICPA, Technical Questions and Answers) to provide nonauthoritative guidance when applying “Pending Content” in FASB ASC 205-30 to the accounting for primarily single- employer DB and DC retirement plans. Although the information contained in these Q&As may be specific to a single-employer defined benefit or DC plan, the information may be relevant when considering the termination of all types of plans, including single- employer health and welfare plans and multiemployer plans.
These Q&As discuss the different types of plan terminations and the related processes, which may be helpful when determining whether liquidation is imminent, and address numerous issues, such as whether the liquidation basis of accounting applies to partial
plan terminations or plan mergers, the presentation of fully benefit-responsive investment contracts, and the presentation of comparative financial statements.
These Q&As are included in appendix H of this guide. Readers are encouraged to read these Q&As as a collective set of guidance.
X.93 When an ESOP is ultimately terminated, the interest of each participant in the trust fund is
distributed to such participant or his or her beneficiary at the time prescribed by the plan terms and the IRC. Commonly, the ESOP trustee will pay all liabilities and expenses of the trust fund and will sell shares of financed common stock held in the loan suspense account to the extent it determines such sale to be necessary in order to repay outstanding ESOP loans.
X.94 Generally, the termination process for an ESOP includes the following:
a. Decision to terminate the plan through resolution of the governing body
b. Amendment of the plan to terminate and cease benefit accruals. (Note: The plan must be brought up to date with all required amendments through the termination date.) c. Satisfaction, repayment, or other settlement of the ESOP debt, if any
d. Notification of participants concerning the termination
e. Application for a determination letter from the IRS (Form 5310, Application for Determination for Terminating Plan) about whether the plan termination affects the qualified status of the plan. The application for a determination letter is optional for an ESOP plan. If filed, it must be filed with the IRS within a year of the proposed termination date. Additionally, plan management or the trustee is not required to hold the assets until a favorable determination letter is issued but usually will do so as a safety feature to ensure that distributions will receive the favorable tax treatment. f. Distribute the ESOP assets as soon as it is administratively feasible. Note: If actions
are taken to terminate an ESOP but the assets are not distributed as soon as administratively feasible, the ESOP is not considered terminated for purposes of IRC Section 401(a), “Qualified Pension, Profit-Sharing, and Stock Bonus Plans.” The ESOP’s qualified status must be maintained until the ESOP is terminated in fact. In accordance with the “IRS Retirement Plans FAQs regarding Plan Terminations,” whether distributions are made as soon as it is administratively feasible is determined under all the facts and circumstances of a given case but, generally, the IRS views this to mean within one year after the ESOP termination. 9
Note
9 This document is available at www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs-regarding-Plan-
When an employer experiences financial difficulties or files for bankruptcy, a decision may be made to terminate the ESOP, resulting in 100-percent vesting of all participants. The ESOP stock would be re-appraised as of the termination date. Distributions would then proceed as called for in the plan document and distribution policy. In some situations, the plan or distribution policy might be amended to accelerate the timing of distributions in connection with the liquidation of the plan.
X.95 In the event of an orderly liquidation of the ESOP as of the financial statement date, the
leveraged ESOP trust would be relieved of its obligation to pay the debt with no other claim against plan assets other than shares held as collateral.