Compliance September 3, 2015

DOL Accuses ESOP Fiduciaries of Prohibited Transactions

A lawsuit says BAT Masonry was valued at $13 million less than what its ESOP paid for company stock.
Reported by

The Department of Labor (DOL) has filed a complaint alleging that fiduciaries of the BAT Masonry Co. Inc. Employee Stock Ownership Plan (ESOP) breached their duties of prudence and loyalty to the ESOP and engaged in prohibited transactions in connection with the ESOP’s purchase of the company stock and one trustee’s withdrawals of cash thereafter, in violation of the Employee Retirement Income Security Act (ERISA).

The complaint further alleges that fiduciaries effectively abandoned the plan and breached their fiduciary duties.

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According to the DOL, BAT Masonry Co. Inc., the sponsor and administrator of the plan, established the ESOP as of May 1, 2009. The trustees of the plan were Wayne B. Booth, Gregory Booth and Melvin Hinton. In July 2010, the ESOP purchased all the stock of the company from the Wayne Booth Revocable Trust, an entity controlled by Wayne Booth, for $1.6 million in cash and two promissory notes in the amount of $11.9 million, a total purchase price of $13.5 million.

The purchase price was based on a valuation of the company conducted by SMK, which the company had hired for that purpose. However, the DOL says SMK’s valuation of the company was flawed in several respects, resulting in the ESOP overpaying the Wayne Booth Revocable Trust for the company stock.

SMK failed to account for the deteriorating fundamentals of the company’s business and improperly treated $5.8 million that Wayne Booth had previously withdrawn from the company’s account, and which he never intended to repay, as an account receivable, among other errors. The trustees of the plan relied on SMK’s valuation, despite knowing the financial condition of the company was deteriorating.

In December 2010, the company hired another valuation firm, which valued the company at $163,590, more than $13 million less than what the ESOP had paid for company stock only months before.

In addition, Wayne Booth continued drawing cash out of the company after the ESOP transaction, even though he no longer held any ownership interest. These withdrawals totaled at least $1.25 million. The company treated these withdrawals as payments from the ESOP to Wayne Booth, even though Booth’s withdrawals bore no relationship to the terms of the ESOP note, and the ESOP never received company shares in return for Booth’s withdrawals.

BAT Masonry Co. went out of business in mid-2012, rendering the shares held by the ESOP valueless. At this time Gregory Booth and Hinton started their own company, M.H. Masonry. M.H. Masonry employs many of the same employees as the now-defunct BAT Masonry, purchased equipment owned by BAT at a significant discount, and is located at the same address as BAT.

The lawsuit seeks to require each of the fiduciary defendants jointly and severally to restore all losses caused to the plan as a result of their fiduciary breaches. It further seeks disgorgement of any and all unjust enrichment that certain fiduciaries received as a result of their fiduciary breaches.

The DOL’s complaint can be viewed here.

Benefits September 3, 2015

Most Employers Implemented FSA Rollover Rule

More than half allow employees to rollover leftover balances versus offering a 2 1/2-month grace period for using funds.
Reported by

When flexible spending account (FSA) plan changes became effective for plan year 2014, more than half of companies (51%) adopted the rollover option, versus 49% that elected to offer a 2 1/2-month grace period for using FSA funds, according to the 2014 Flexible Spending Account Trends Study from the Healthcare Trends Institute.

In November 2014, regulators modified the FSA use-it-or-lose-it rule to allow up to $500 of unused amounts remaining at the end of a plan year in a health FSA to be paid or reimbursed to plan participants for qualified medical expenses incurred during the following plan year, provided that the plan does not also incorporate the grace period rule. Plan sponsors have always had the option of allowing employees a grace period permitting them to use amounts remaining unused at the end of a year to pay qualified FSA expenses incurred for up to two and a half months following year-end.

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Sixty-eight percent of employers that implemented the FSA rollover rule said they did so to encourage participation by those employees that were reluctant due to the fear of losing money they put into the account. More than one-quarter of employers (27.6%) indicated they adopted the rollover rule because employees’ year-end balances tend to be lower than $500, so it made sense to give them the ability to roll over into next year. Slightly more than 4% of employers said employees requested the rollover option.

Among those employers that did not implement the FSA rollover rule, 37% did not want to change their system or processes to manage the change, and 20.4% did not want to increase employee communication efforts to explain the new benefit and are happy with the grace period option. However, of those that did not offer the rollover option in 2014, 40.5% stated they will consider the option in the future.

While most companies (66%) reported they didn’t experience any challenges as a result of adopting the rollover option, nearly 20% reported administrative roadblocks, followed by 17% that had system compatibility issues. Others grappled with employee education and communication concerns.

The results of the study may be downloaded from here. A free registration is required.

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