ESOPs & Succession Planning for your Transportation company

ESOPs & Succession Planning for your Transportation company

Succession Planning – the process and strategy for identifying the critical positions within your transportation company and developing an action plan for potential leaders.

This article will provide insight on employee stock ownership plans (ESOP) and how they can be an option for succession planning for transportation companies. An ESOP can provide many benefits, such as tax savings for owners and the business and increasing the culture of ownership by involving employees who have shown service and loyalty. No matter what succession planning strategy is used, it is crucial to establish a plan early and set goals to achieve the objective.

Understanding ESOPs for Transportation Business

ESOP Basics

An Employee Stock Ownership Plan, or ESOP, is a qualified defined contribution employee benefit plan authorized under the Employee Retirement Income Security Act (ERISA). This type of plan is similar to the popular 401k profit-sharing plan that many businesses use. Here are a few basics of an ESOP:

  • It can provide employees with the opportunity to own shares of stock in the company.
  • It can be used in conjunction with other retirement plans, such as a 401k plan. However, often an ESOP is used as a replacement for other traditional retirement plans.
  • An ESOP is a tax-deferred investment of shares of company stock allocated to each eligible employee’s account. Ideally, the stock will appreciate over time as the business grows.
  • An ESOP is structured as a trust, with the employees as beneficiaries of that trust. An individual appointed as a trustee administers the plan and makes the majority of the decisions. After the ESOP is created, significant corporate actions usually are voted on by participants in the plan.
  • An ESOP can be funded by cash, stock, or debt. Regardless of how it is funded, cash must be available to pay out to exiting owners who retire or otherwise terminate employment.
  • An annual business valuation is required by an independent professional to determine the fair market value of the business for purposes of determining participant account balances for the plan.

ESOP Benefits for Employees

  • Ownership and retirement savings are directly affected by the success of the business. Employees can align their goals with the company in order to drive growth.
  • Any growth in the retirement plan is tax deferred until the employee retires.
  • There is a guaranteed market for sale of shares in the plan. When an employee retires, the ESOP agrees to repurchase those shares at the fair market value.

ESOP Benefits for Shareholder/Employer

  • If the ESOP purchases at least 30 percent of a C corporation’s outstanding stock, the previous owners can elect a Section 1042 Rollover to avoid paying capital gains tax on the sale of their stock. To do so, all sales proceeds must be placed in a qualified replacement property. The selling owners will pay capital gains tax only when they sell their replacement investments.
    • Qualified replacement property (QRP) – any security issued by a domestic “operating corporation.” An “operating corporation” is a business that, for the taxable year preceding the taxable year in which such security was purchased, had no passive investment income
    • An ESOP may own a portion or all of the stock in a company.
  • If the transportation business is structured as a C Corporation, dividends paid on ESOP-held stock are tax deductible.
  • If the business is structured as an S Corporation, the portion of earnings related to the ownership of the ESOP will pass through to the ESOP (rather than to individual shareholders) and avoid taxation by the individual shareholders.
  • Selling an ESOP will result in a stock sale versus an asset sale. Given the large amount of depreciation recapture built up from vehicles and other equipment, it may be more advantageous to sell stock than assets and receive favorable tax treatment.

ESOPs for Transportation Companies

Historically, many transportation companies have not utilized ESOPs. Setting up an ESOP requires available cash or the ability to take on more debt. Based on how transportation industry participants typically operate, these factors can make it difficult for companies that are heavily leveraged and require large annual capital expenditures. Even if cash restrictions and/or leverage limitations make it difficult to implement an ESOP, the benefits listed above still apply.

Does an ESOP Make Sense for your Business?

Historically, the ideal structure for implementing an ESOP consists of 20 employees or more and annual revenues of $10 million or more. The company must be large enough to spread out various plan costs and investment risks across the participating employees. Below are the general attributes of companies that may or may not want to consider implementing an ESOP:


  • The business has low debt levels and can finance all or a portion of an ESOP transaction.
  • The company is intended to be transferred to employees (no family in place to take over).
  • The current employee pool is expansive (50 or more) and has qualified management candidates.
  • The owner(s) is willing to receive a significant portion of the benefits of ownership change over a period of time.
  • The company has predictable cash flow and consistent historical earnings performance (no substantial, out-of-the-ordinary large capital expenditures expected for the future).


  • The business is already heavily leveraged with debt and would not be able to finance an ESOP.
  • The business is intended to stay in the family.
  • The current employee pool is not qualified to run the business without current ownership, or the existing employee group is small (20 or less).
  • The owner(s) is looking to receive a large part of the benefits of ownership change immediately or in a relatively short time period.
  • The company has unpredictable cash flow and historical earnings performance (this may include large unusual capital expenditures that may be needed in the future).

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Due to their significant tax benefits over other exit strategies, employee stock ownership plans have been a compelling succession planning option for transportation companies. If you answered “yes,” to the above and think an ESOP may make sense for your transportation business, let’s talk.

Smith Schafer experts can help determine why and when an ESOP makes sense, the fair market value for your transportation company, and assist in evaluating the exit strategy structure that meets your goals.

401k Plan Audit: Fiduciary Responsibility

401k Plan Audit: Fiduciary Responsibility

Many business owners offer a 401k plan to their employees. It is a great way to help employees save for retirement, and it allows the owner to contribute to their account as well. It can also be an attractive benefit for hiring and retaining employees in the current market. However, as your business and retirement plan grow, you may become subject to a retirement plan audit. Generally, an independent auditor must audit a retirement plan’s financial statements once it has more than 100 eligible participants – or 120 if the plan has not been previously audited.

A 401k plan audit can be an unexpected part of offering this benefit to employees. Most companies are not prepared for a detailed examination of the plan’s compliance requirements, the company’s (and/or trustee’s) fiduciary responsibility, and internal controls. This blog series will look at four parts to successfully navigate the audit of your 401k plan: fiduciary responsibility, operational compliance, financial reporting, and document gathering and organization. We will discuss what to consider, what to expect, and how to prepare for a 401k plan audit. In this first installment, we discuss the plan’s fiduciary responsibilities, best practices, and the proper use of forfeitures.

Fiduciary Responsibilities

Fiduciaries are generally those individuals or entities who manage an employee benefit plan and its assets. Companies often hire outside professionals, sometimes called third-party service providers, or use an internal administrative committee or human resources department to manage some or all a plan’s day-to-day operations. Even if a company hires third-party service providers or uses internal administrative committees to manage the plan, it still has fiduciary responsibilities.

A plan must have at least one fiduciary, a person or an entity, named in the written plan or through a process described in the plan. The named fiduciary can be identified by office or by name. For some plans, it may be an administrative committee or a board of directors. Additional examples of a plan’s fiduciaries include:

  • the trustee
  • the investment advisers
  • all individuals exercising discretion in the administration of the plan
  • those who select committee officials

Attorneys, accountants, and actuaries generally are not fiduciaries when acting solely in their professional capacities. Determining whether an individual is a fiduciary depends on whether they are exercising discretion or control over the plan.

Not all decisions regarding a retirement plan are fiduciary actions – some are business decisions. For example, it is a business decision when an employer decides to establish a plan, create a benefits package, include certain features in a plan, or amend or terminate a plan. However, when an employer or someone hired by the employer takes steps to implement these decisions, that person is a fiduciary.

Fiduciary Best Practices

The following are best practices that will help ensure the fiduciaries are acting in the best interest of plan participants:

Form an Oversight Committee

This group should meet regularly to review plan features, monitor service providers, discuss investment options, review plan expenses, and review processes related to the plan. This group should also meeting with the plan’s third party administrator and/or investment advisor at least annually to review the above-mentioned items. Minutes should be maintained for all meetings

Develop an Investment Policy

An investment policy is a road map documenting which types of investments will be offered as options in a plan. It provides the plan’s general investment goals and describes the strategies the investment advisor or manager should employ to meet these objectives. The policy will also help the oversight committee determine if changes are needed to the mix of investments offered by the plan.

Hold Regular Meetings with Participants

The oversight committee should meet periodically with plan participants to ensure they have the most current information regarding the plan. These meetings may also include investment advisors or other plan service providers.

Ensure the Plan has Adequate Fidelity Bond Coverage

The Department of Labor requires those who handle retirement plan funds generally must be covered by a fidelity bond. This is not the same as the plan sponsor’s crime or D&O policy. The fidelity bond covering the plan must specifically name the plan as a covered party, cannot have a deductible, and must cover at least 10 percent of plan assets (with a maximum of $500,000 of coverage). An authorized surety company must also issue the bond. A list of these approved companies can be found here.

Ensure the Proper Use of Forfeitures

As mentioned earlier, retirement plans can be used as an employee retention tool. Employers typically implement a vesting schedule for employer contributions to entice employees to stay longer. This means employees earn rights to the employer contributions over time, which gives the employee an incentive to remain with the company.

Forfeitures occur when an employee terminates service before being fully vested in the employer contribution portion of their account balances and are typically used to reduce future employer contributions or pay reasonable plan expenses.

Forfeitures can also be allocated among remaining participants as an additional contribution. The plan document should specify how forfeitures are to be used. Plan management should ensure forfeitures are utilized regularly (typically at least annually) and in accordance with the plan document.


A sound fiduciary policy and oversight of a plan is the cornerstone of excellent plan internal controls. If you have any questions about your company’s fiduciary duties or have an employee benefit plan that needs an audit, feel free to contact us at [email protected] and we will assist you.

401(k) Plan Tips from a CPA Firm

401(k) Plan Tips from a CPA Firm

A 401(k) plan is one of the best options available to help employees save for retirement. However, these plans will only be successful if managed properly. Below are tips for effective and efficient management of your company’s 401(k) plan.

Plan Management Responsibilities

Fiduciary Responsibilities

  • As fiduciaries, you are responsible for the best interest of plan participants. The plan should have an oversight group that meets regularly to review plan features, monitor service providers, discuss investment options, and review processes related to the plan. Minutes of these meetings should be documented and maintained with other audit documentation.

Over-Reliance on Service Providers

  • Plan management and/or trustees are required to monitor the management and performance of all service providers with which the plan has contracted. Plan management and/or trustees should make sure all responsibilities in all areas of the plan are clearly understood and stated between the plan fiduciaries and the plan service providers.

Plan Effectiveness

  • It is important to educate your employees on the benefits and provisions of the plan. Knowing all of the options makes it easier for employees to enroll in the plan and subsequently increase their savings amount.

Fidelity Bond Coverage

  • The Department of Labor requires those who handle retirement plan funds must be covered by a fidelity bond. This is not the same as the plan sponsor’s crime or D&O policy. The fidelity bond covering the plan must specifically name the plan as a covered party, cannot have a deductible, and must cover at least 10 percent of plan assets (with a maximum of $500,000 of coverage). The bond must also be issued by an authorized surety company. A list of these approved companies may be found on the Department of Labor website.

Plan Operations

Investment Policy Statement

  • Your plan should maintain a written investment policy statement. This statement provides the general investment goals and objectives of the plan and describes the strategies the investment manager should employ to meet these objectives.

Discretionary Contributions

  • Plan management should document any discussions and eventual decisions regarding discretionary employer contributions to the plan. Generally, this issue should be addressed annually.

Use of Forfeitures

  • Forfeitures are typically used to reduce future employer contributions or pay reasonable plan expenses. Forfeitures may also be allocated among remaining participants as an additional contribution. The plan document will specify how forfeitures are to be used. Plan management should ensure forfeitures are utilized on a regular basis and in accordance with the plan document.

Required Minimum Distributions

  • Required minimum distribution rules require a participant to withdraw a portion of his or her funds from the plan at a certain rate once they reach the later of age 70½ or retirement. Plan management should ensure participants and former participants are aware of this requirement so the required minimum distributions are timely paid.

Retirement Plan Audits

Personnel Files

  • One of the focal areas of any retirement plan audit is the review of personnel files. Plan management should ensure these files are complete, including hire and termination date, pay rates, loan and hardship withdrawal support, and any other important benefit elections. Files should also be clean, organized, and consistent in order to ensure documentation is maintained to be in compliance with the plan document and all participants are treated consistently.

Transaction Documentation

  • Two common areas where documentation can be lacking are hardship withdrawals and loan withdrawals. Hardship withdrawals must be specifically allowed by your plan document and must be for an immediate and heavy financial need of the employee. Hardship withdrawals are meant to be a last resort after all other resources have been used. Plan management is responsible for verifying these criteria and maintaining any documentation related to these withdrawals.
  • Loan withdrawals must also be specifically allowed by your plan document. These withdrawals are commonly processed by a plan’s third-party administrator; however, plan management is still responsible for monitoring the status of these loans for default or early payoff. All documentation relating to loan withdrawals should also be maintained by plan management.


Retirement plan compliance is complex, requiring help from trusted professionals who understand the challenges, rewards, and opportunities associated with effective retirement planning. For more information about the above tips or to learn about how we can help, please contact a Smith Schafer professional.

Construction Industry: What you Need to Know About Employee Benefit Plan Audits

Construction Industry: What you Need to Know About Employee Benefit Plan Audits

Is your construction company required to undergo an employee benefit plan audit? This audit is required under federal law to ensure the plan’s functions, operations and processes are in compliance with established regulations. Unfortunately, these audits do not always go smoothly because the plan sponsor does not always understand the documentation, information and financial statement requirements for the audit. To help construction companies streamline the employee benefit plan audit process, Smith Schafer has provided a list of steps below to help companies prepare.


In general, retirement plans with more than 100 participants as of the beginning of the plan year are classified as a large plan. Large plans must complete Schedule H with the Form 5500 Annual Report and are required to have an audit. Small plans must complete Schedule I with the Form 5500 and are not required to have an audit.

The participant count used to make these determinations includes all employees who are eligible to participate in the plan, regardless of participation. It also includes all participants who have separated employment but still have a balance within the plan.

IMPORTANT: There are exceptions to these general rules. Your construction company’s plan third party administrator (TPA) will often inform you when an audit is required. However, if you believe you are close to being considered a large plan, you should review your plan activity and contact your TPA sooner rather than later.


Once it has been determined your construction company needs an audit, the first step is to select an independent CPA firm to perform the audit. It is important to select a firm with the necessary skills and retirement plan experience to provide the services your plan needs.

Here are a few simple ways to find an audit firm with retirement plan experience:

  • The American Institute of Certified Public Accountants website contains a list of firms by location that are members of the Employee Benefit Plan Audit Quality Center. These firms are required to meet additional quality control standards related to retirement plans.
  • Form 5500 Annual Reports are public documents that can be viewed on the Department of Labor website. These reports will include audited financial statements for all large plans.
  • Ask your current service providers if they can recommend a firm they have worked with in the past.

TIP: It may seem like an easy solution to use the CPA firm you use for your corporate accounting needs. However, that firm may not have the required skill or expertise to audit your retirement plan effectively and efficiently. It is worth the extra effort to find a firm that will provide the results your plan needs.


The purpose of a retirement plan audit is to test financial information, participant information and compliance with plan documents and regulations. During the audit, your auditors will review your plan’s records and transactions, and may ask for additional documentation to support any of the transactions. Some of the areas that are tested during the audit include:

  • Contributions – employee and employer, if applicable
  • Participant data and accounts
  • Distributions
  • Loans, if applicable

Significant audit areas for the construction industry are the definitions of eligible participants and eligible compensation. The plan documents will specify when an employee is considered eligible to participate in the retirement plan. In many construction company plans, employees who belong to a union, are not eligible. Your plan may have a length and/or hours of service requirement, which could impact seasonal or temporary employees. The plan documents will also define compensation for the purposes of the plan. Often times, there is compensation excluded from the definition, such as bonuses, overtime and certain expense reimbursements.

TIP: Before your first audit, be sure to gather and read your plan documents and determine if your plan is following all the various provisions. If something is unclear, inquire of your TPA or other plan service provider.


After the audit has been completed, your auditor will issue three documents related to the audit:

  • A report on the financial statements.
  • A letter commonly referred to as a “management letter.” This letter is an overall summary of the audit and discusses your plan’s accounting policies, any difficulties encountered in performing the audit, any disagreements with management, and any other audit findings or issues that need to be brought to management’s attention.
  • A letter commonly referred to as an “internal control letter.” This letter is meant to identify and communicate areas of operations or procedures where your plan can strengthen or redesign internal controls.

The insights shared by the auditor in these documents should be reviewed and discussed with management prior to filing the Form 5500 and audit report.

TIP: Ask questions!  If you do not understand something, ask. If you think something is wrong, say something. The audit is a reflection of your retirement plan and you are ultimately responsible for it.

The best way to ready your construction company for an employee benefit plan audit is to prepare throughout the year by keeping detailed records and conducting self-audits at regular intervals. If you would like more information or if you are seeking an experienced team that specializes in employee benefit audits, Smith Schafer wants to help! We can take a second look at your current plan and fees at any time.

2018 Health Savings Account Contribution Limit Change

2018 Health Savings Account Contribution Limit Change

In October 2017, the Internal Revenue Service (IRS) released the 2018 contribution and benefit limits for retirement and other benefit plans types. The IRS recently announced revisions to the Health Savings Account (HSA) contribution limit for individuals with family coverage. This change is a result of the tax reform law. Keep in mind, for HSA purposes, family coverage is any coverage other than self-only coverage. 

Below are a few HSA contribution highlights

  • The new 2018 HSA contribution limit for individuals with family coverage is $6,850, which is $50 less than the previously announced limit of $6,900. This change will only affect you, if you had intended to “max out” your 2018 HSA contributions.

Example: If you intended to contribute $6,900 to your HSA for 2018, you will now be able to contribute only $6,850. If you have already contributed more than $6,850 to your HSA for 2018, to avoid adverse tax consequences, you will need to take a withdrawal of the excess contribution before April 15, 2019 or before you file your 2018 personal income tax return. If you find yourself in this situation, contact the HSA custodian for information about the paperwork you will need to complete for the excess contribution withdrawal.

  • This change does not affect you if you are enrolled in self-only coverage for all of 2018. In this case, your annual contribution limit for 2018 will remain $3,450.
  • If you are age 55 or older as of December 31, 2018, you may still contribute an additional $1,000 in catch-up contributions to your HSA for 2018.
  • If you are not eligible to make HSA contributions for all of 2018 because, for example, you enroll in Medicare during the year or cease being covered by a high deductible health plan, your HSA contribution limit will be pro-rated.

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It is important to update plan documents and benefit plan materials to reflect the recent changes. It is also important to consider any individual participant notification requirements that are necessary to remain in compliance with plan rules. If you have questions about the changes or their impact on your benefit plans, please contact Smith Schafer for assistance. 

Save Taxes While Controlling Employee Health Costs

Save Taxes While Controlling Employee Health Costs

If rising health care costs have sent your company searching for ways to reduce expenses, you should know there are alternatives to standard medical insurance plans. Your choices are not limited to either paying the higher costs yourself or transferring the burden to your employees. Tax-advantaged strategies are available which can mitigate the effect of rising costs for you and your staff members. Here are three ideas to consider:

1. Establish a Health Insurance Premium-Only Plan (POP)

This super-simple option is often a good choice for small employers. With a POP, your employees are charged via payroll withholding for their share of health premiums. These withholdings are considered salary reductions for federal income tax, Social Security tax, and Medicare tax purposes. In other words, the POP allows your employees to pay their share of health insurance premiums with pretax dollars, which can save them a substantial amount of taxes over the course of a year.

At the same time, your company’s taxes are also reduced. Reason: the salary reduction amounts are exempt from the employer’s share of Social Security tax and Medicare tax. For 2017, the employer’s share of these taxes is 7.65% of the first $127,200 of each employee’s salary, including bonuses, plus 1.45% of compensation above $127,200 (up from $118,500 for 2016). Individuals with earned income above $200,000 or married couples with earned income above $250,000 must also pay an additional 0.9% in Medicare tax (no limit). 

Because a POP is considered a “cafeteria benefit plan,” it’s governed by Section 125 of the Internal Revenue Code. This means your business will need to install a written plan and employee enrollment procedures when setting up the program. The POP cannot discriminate in favor of highly compensated employees or key employees. Despite these restrictions, it’s generally easy and inexpensive to establish a POP with professional help.

Basic cost-reduction strategy: First, shift a higher percentage of premiums for employee health coverage to your employees. This reduces your company’s costs. Then set up a POP to give your employees an offsetting benefit in the form of reduced income tax, Social Security tax, and Medicare tax. The same strategy also cuts the company’s tab for Social Security and Medicare taxes.

2. Set Up a Flexible Spending Account Plan

Setting up and operating a Flexible Spending Account (FSA) is more complicated than the POP option. Therefore, these plans are probably best suited to businesses with a larger number of employees.

Here’s how FSAs work: Your company sets up a health care flexible spending account for each participating employee. Then, the employee makes an annual election to contribute a specified dollar amount of his or her salary to the FSA and these contributions are withheld from the employee’s paychecks. To be reimbursed, the employee submits a claim for his or her share of health insurance premiums and uninsured medical expenses (up to the annual amount contributed to the FSA). The reimbursements are tax-free to the employee.

Employee FSA contributions are considered salary reductions, which means they are exempt from federal income tax, Social Security tax, and Medicare tax. So they allow your employees to pay out-of-pocket medical expenses (including their share of health premiums) with pretax dollars. Your company’s taxes are also reduced, because the salary reduction amounts are exempt from the employer’s share of Social Security and Medicare taxes.

Like POPs, FSA plans are considered “cafeteria benefit plans” under Section 125 of the Internal Revenue Code. Therefore, your business will need to install a written plan and employee enrollment procedures. The plan cannot discriminate in favor of highly compensated employees or key employees. An FSA plan also requires significant administrative effort to enroll employees, handle the necessary payroll withholding, and process reimbursement claims. Many companies find it cost-effective to hire a third-party plan administrator to take care of all the details.

Finally, The Affordable Care Act (as well as many companies) place an annual lid on the amount an employee can contribute to the health care FSA. This is important, because employees can request reimbursement for expenses up to their annual contribution long before the contributions have actually been collected through the payroll withholding. For 2017, the limit is $2,600. This limit will be adjusted for inflation in subsequent years.

Basic cost-reduction strategy: First, shift a higher percentage of employee health premiums to your employees, or increase the insurance plan deductibles. Or take both actions. Your company’s costs will be reduced. Then, set up an FSA plan to give your employees an offsetting benefit in the form of reduced income, Social Security, and Medicare taxes. The FSA also cuts the company’s Social Security and Medicare tax bills.

3. Install a Health Reimbursement Arrangement (HRA)

The option to set up an HRA can be attractive to larger employers. Here is how it works: Every year, the company agrees to contribute a fixed amount to each eligible employee’s account. Employee contributions are not allowed. The company deducts the HRA pay-ins. However, the contributions are tax-free to employees (no federal income tax, Social Security tax, or Medicare tax). Your employees can then submit claims to be reimbursed for uninsured medical expenses, including their share of health insurance premiums, if applicable. Reimbursements are tax-free. In effect, the employee is able to pay for out-of-pocket medical expenses with pretax dollars, up to the amount contributed to the employee’s HRA account.

Since your company must pay for all HRA contributions, this arrangement only saves money when it’s combined with a much-less-generous employee health insurance program. The idea is that your company’s health insurance costs will be drastically reduced, which allows you to return some of the cost savings to employees in the form of HRA contributions.

Basic cost-reduction strategy: First, switch your health insurance plan to one which greatly reduces your company’s premium costs, which of course, means it provides less benefits to employees. Then, return a portion of the savings to employees via the tax-favored HRA arrangement.

Employers will face a wide array of responsibilities and requirements under the ACA. Smith Schafer can guide you through every facet of structuring and managing the right employee benefit plan program for your business. We work closely with numerous retirement plan service providers, including local financial advisors and reputable asset trustees/custodians. We can take a second look at your current plan and fees at any time. Click to contact our Employee Benefit Services Group for additional information.