Age 55 Diversification

1. Age 55 Diversification 18th Annual Ohio EmployeeOwnership Conference Presented by Dorn SwerdlinSwerdlin & CompanyFriday, April 16, 2004

2. What We Will Discuss • Basic Rules • Examples • Timeline • Election Forms • Acting on Election • Diversification Calculations • Sticky Issues

3. Basic Rules

4. Age 55 Diversification • Code Section 401(a)(28)(B) • Allows participant to diversify out of company stock.

5. Eligibility Age 55 10 years ofparticipationin plan

6. Stock Eligibility • Shares of company stock acquired by trust after December 31, 1986 • May be allowed with respect to all shares

7. Election Period • 6 year period • Begins when participant meets eligibility requirements

8. Elections Able to diversify 25% of qualifying shares First 5Years Final option to diversify up to50% of qualifying shares 6th Year

9. Computing Shares - Any shares that have been previouslydiversified Total of allocationshares that haveever been eligiblefordiversification minus

10. Exceptions • Not required if shares in participant’s company stock account have a market value of $500 or less < Market Value $500

11. Timing of Elections • Must be granted to participant within 90 days of close of plan year during which he meets requirements

12. Implementation • Within 90 days after the last day of the 90-day election period

13. Alternatives • Company may implement diversification elections by: • Making a distribution of the diversified shares or • Providing at least 3 investment options within the ESOP (or another plan)

14. K Corporation L Effective Date of ESOP:January 1, 1980 Diversification Occurs:Age 55 and 10 years of participation KL Corporation also sponsors a 401(k) Plan

15. Leon Kelso Date of Birth:January 1, 1935 Date of Participation: January 1, 1995

16. Diversification Procedures Timetable

17. 06/30/2005(180 days) 03/31/2005(90 days) 04/30/2005 01/01/1990 04/15/2005 01/01/1995 01/01/2004 12/31/2004 01/01/2005 10 years plan participation(eligible for diversification) Appraisal and Allocation Complete Preliminary Explanation Preliminary Election Form Returns Preliminary Form Final Election Form Execute Transfer LK Attains Age 55 Joins Plan Diversification Timeline

18. Election Forms Preliminary 2004 Diversification Election Notice

19. Election Forms Final 2004 Diversification Election Notice

20. Election Forms Final 2009 Diversification Election Notice

21. Acting On The Election • Transfer to KL Corporation 401(k) • Take Cash • Taxed as ordinary income and subject to any applicable penalties • Roll over to IRA • Take Stock • Put Option is available (closely held)

22. Diversification Calculation If the plan allows the participant to diversify more than the number of shares required under the Code, there are no provisions under the Code or regulations allowing those shares to be deducted from the amount available for diversification during the qualified election period. However, they must be included in determining the total number of post 1986 shares allocated to the participant's account.

23. Sticky Issues

24. Determining Years of Participation General yearof servicedefinition 1,000 hours ofservice withina 12-month period Vesting: 1,000 hours of service in a plan year Eligibility:1,000 hours during initial year of employment and anniversaries thereof – or – if fewer than 1,000 hours during initial year of employment, measurement period reverts to plan year Active Employees

25. Determining Years of Participation • Code is unclear • Conservative approach: As long as a terminated participant has a vested benefit remaining in the plan, he/she is considered to be a “Participant” under the Internal Revenue Code; therefore, for each plan year that they have a vested balance, they have a year of participation for diversification purposes What About Terminated With a Vested Account Balance?

26. Determining Years of Participation What Happens When Plans Merge? • There is no clear guidance; however, the conservative approach is to count years of participation from entry in the older plan. Employer sets up new ESOP Mergesexisting 401(k) intoESOP Right Away:Participants may have 10 years ofparticipation if you include their years in the 401(k) plan

27. Determining Years of Participation • Recommendation • In both instances, draft documents to specifically define years of participation for diversification purposes.

28. What About Reshuffling? • Each participant has same proportion of shares and cash • How do you keep track of shares? • Administratively maintain separate “buckets” for post 1986 shares • For qualifying participants, diversify within the plan and transfer diversified shares to cash investment • Any other suggestions?

29. Deadline Dilemmas • How do you meet the 90 Day and 180 Day deadlines? • Offer a preliminary diversification election form based on prior year information • Upon completion of appraisal and allocation, provide a final election form based on final information

30. Deadline Dilemmas • What if you miss the deadline? • Creates an operational error for the plan. • Correct the problem so that the plan is in the same position it would have been had the error never occurred; offer the participant the diversification right at the price that would have been paid when the election should have been made