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Private Company ESOP Plan Sponsor Responsibilities

November 9, 2021 3 Min Read Article, ESOPs
Nicholas W. Ward, CPA Director, Audit & Accounting

Choosing to establish an ESOP is a significant business decision for any company. Along with that decision comes the fiduciary responsibility of the plan sponsor and trustee concerning the plan itself, including the potential need for an annual audit. Plan sponsors need to be aware of what is required to comply with Employment Retirement Income Security Act (ERISA) laws, U.S. Department of Labor (DOL) and IRS regulations for the plan, as well as understanding recordkeeping duties to ensure the plan stays in compliance with its plan document.

The following are a few aspects of ESOPs that plan sponsors should be familiar with:

  1. ERISA fidelity bond coverage. ERISA requires that individuals who handle plan funds must be covered by a fidelity bond to protect the plan from losses due to fraud or dishonesty. Generally, each person must be bonded in an amount equal to at least 10 percent of the plan assets he or she handled in the preceding year. For ESOPs, the bond must meet that minimum amount of coverage up to $1,000,000 since the plan holds employer securities.
  2. IRS Form 5500 filing and yearly audit. Similar to 401(k) and pension plans, ESOPs are required to file an annual Form 5500 tax return. Depending on the number of eligible participants in the ESOP, the plan may also require an annual audit by an independent public accountant as part of the 5500 filing.
    Generally, the ESOP will require an audit if there are more than 100 eligible participants in the plan at the beginning of the plan year. Many ESOP plan documents are written so that employees are eligible as of the beginning of each plan year even if eligibility requirements aren’t met until later in the plan year, which can trigger the need for an audit even if the ESOP is new or in its early stages.
    Additionally, plan sponsors will need to obtain a valuation of the company stock soon after fiscal year-end to provide the auditors with enough time to complete the audit within regulatory deadlines.
  3. Accurate employee data and proper plan allocations. Plan sponsors are responsible for transmitting accurate data to ESOP recordkeepers to ensure that participant accounts are accurately stated and that employees are disbursed correct amounts from the plan. Incorrect demographic and payroll data could result in errors in allocations for employees, which can cause misstated participant balances and mounting headaches for plan sponsors. Similarly, not administering the plan in compliance with the plan document may lead to penalties (monetary and non-monetary) for the plan sponsor.

Plan sponsors have many important responsibilities when it comes to managing ESOPs.  Keeping the plan in compliance with the plan document and observing regulatory agency directives, along with the selection of capable fiduciaries, recordkeepers, and other third-party service providers, are essential to properly administering an ESOP.

Nicholas W. Ward can be reached at Email or 215.441.4600.

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Nicholas W. Ward, CPA

Nicholas W. Ward, CPA

Director, Audit & Accounting

ESOPs Specialist

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