Last fall some of you participated in an interesting discussion re: a plan purchasing privately held stock from a plan participant/company shareholder. See link:



http://benefitslink.com/boards/index.php?showtopic=16557



My question is, would you reach the same conclusion (i.e., transaction is permissible provided independent valuation of stock is performed), if the shareholders want to use the stock to pay off participant loans?



Shareholders are S-corp shareholders and loans are post-EGTRRA.

If the shareholder uses shares to pay off a loan, I assume that he would be treated for his individual tax purposes as if he sold the stock. Has anyone looked at that issue? Does he still want to do it?

What will the trustee do with the stock? Is he able to sell it? If yes, why doesn't the shareholder sell it and use the proceeds to pay the loan?

If the trustee isn't planning on selling the stock, has he looked at the UBTI rules?

Does the plan say that it accepts property other than cash as loan payments? Very unconventional and not very smart if it does.

Has any one thought this through (assuming the plan can receive the stock as payment for the loan) what does the plan do with the stock? Since the stock is privately held there is no market for it. Can the plan sell the stock back to the plan sponsor?

These are all good questions. There is no question in my mind that, even if the transaction is technically possible, i.e., not a prohibited transaction per se, it raises serious issues from the perspective of fiduciary prudence.

Christine:

Would you have the same concerns if it was an individually directed plan? It would be hard for the participant to sue the plan for letting him do what he wanted to do with the assets in his account (assuming that the shares go into his personal account).

Kirk, in fact the stock will be held in the participants' individually directed accounts so you are right, the fiduciary prudence issue goes away.

However I am wondering, does this raise issues as to discrimination in benefits, rights and features under the plan? None of the other participants will have the opportunity to invest in company stock under the plan, only the two owners (2/3 of the HCEs under the plan). Of course, the stock is not a particularly good investment, but I don't think that eliminates the possible discrimination issue.

Apparently the discrimination issue I raised is discussed here:



http://benefitslink.com/boards/index.php?showtopic=14662.