1042 and cash contribution

[Guest tmills]

We know 409(n) prohibits a 1042 elector from receiving assets attributable to, or allocable in lieu of, securities acquired in a 1042 transaction. What if the employer makes a cash contribution to the plan, allocated to all eligible participants (including the 1042 elector)? I don't see that such a contribution violates the allocable in lieu of provision, because it is not being made in lieu of anything. However, if that cash is then used to recycle shares, assume all of which have the 1042 taint, the elector's cash can't be used to recycle, agree? Net result being the employer will have to make a larger cash contribution to fund the recycling because any amount that goes to the 1042 elector will not be available for recycling, and the elector will have an increasing cash balance if the recycling process continues. Is there any basis in the code that would keep the elector from receiving the cash in the first place?

[ESOP Guy]

A 1042 person can receive cash contributions and accumulate the cash in an ESOP.

I know I have worked with ESOPs where the 1042 people had just cash in their accounts.

[Guest tmills]

Understand. However would you agree that not only can they, if it's a normal cash contribution, they must receive it if they otherwise meet the plan's contribution eligibility requirements?

[ESOP Guy]

Yes, they have to receive the cash contribution.

In part because of the reasons you describe you will find many ESOP exclude the 1042 people by say job title. Say the former owner stays on as CEO for example. It just eliminates the problems you are talking about.

As a side bonus if such a person is a HCE, which often times they are, since being excluded like that isn't a statutory exclusion it tends to help your coverage test if you are having problems with that. As you now have a HCE who is not benefiting so less then 100% of the HCEs are benefiting. So you can now have less then 70% of the NHCEs benefiting.

I have had that fact help me out more then once with ESOPs.

In fact I have an ESOP that because of high turnover only 30% of the NHCEs benefit as it has last day language. But because only 2 or the 10 HCEs benefit, the rest of them are 1042 people or their family, it passes coverage.

So unless this person just really wants the cash think about excluding the 1042 people form the allocations by amending the plan.

Sorry if that is more answer then you wanted.