• What is your distribution policy?  The details of preparing a distribution policy are beyond the scope of this article.  The purpose of this section is to provide a sample of some of the questions you will encounter when preparing your distribution policy.  Creating your distribution policy is a complex process, and you should work with your ESOP counsel and advisors. 

• Will distributions be paid in lump sum or in annual installments?  In addition to satisfying the statutory timing requirements for offering payments to participants, if the plan opts to pay with installments, the plan must pay substantially equal periodic payments (not less frequently than annual) over a period of time not exceeding five years.  If the balance exceeds a certain amount ($885,000 in 2006), then the installment period could be extended.

• When will participants commence receiving distributions?  Will the plan mirror the statutory timing requirements or will participants be paid on a more aggressive schedule?

• Will the distributions be paid in stock or cash?  If you are a C corporation and your charter or bylaws do not restrict the ownership of employer securities, then you are generally required to offer distributions in the form of stock.  S corporations are exempted from this requirement.  However, you may still elect to offer share distributions, even if they are not required.  One significant benefit of offering share distributions is providing the participants with the potential of more favorable tax treatment when taking distributions (often referred to as net unrealized appreciation (NUA) treatment).

• If you are paying distribution in cash, where will the cash come from?  You will need to use existing cash, contribute new cash to the plan, or redeem the shares (which will require a new stock appraisal as of the date of the redemption).  If you contribute cash, will you have enough deduction room to include both the cash for distributions and for loan payments (if applicable)? 

• If you are paying distributions in shares, who will purchase the shares and what will happen to them?  If the company purchases the shares, will the shares become treasury or retired shares or will they be contributed to the ESOP (again)?

• Will the plan segregate the balances of terminated participants into cash?  This strategy provides that cash from active participant accounts is used to purchase the shares from the accounts of terminated participants.  The main purpose of segregation is to prevent terminated participants from sharing in the growth of the company stock.

• How will the company provide funding for the distributions?  Once the company has selected its distribution strategy, it will have to determine how it will provide the funding.

There are many complexities to creating a distribution policy.  The above-mentioned items are only some of the issues and complexities that need to be explored.  The importance of a well-planned distribution policy should not be taken lightly.

• Are you aware of your future repurchase obligation?  How will the company provide funding for the future repurchase obligation?  You need to have an understanding of the short term and long term financial commitment needed to satisfy the future liability obligation.  The most common method to obtain this understanding is by performing a “repurchase liability study.”  After you know your future repurchase obligation, you need to address how you are going to fund it.  The details of determining and funding the future repurchase obligation are beyond the scope of this article, but it is crucial to the success of your ESOP and your company that you know your future repurchase obligation and plan accordingly.