Benefit Bifurcation

[Guest Grumbles]

I am looking at an ESOP and need some thoughts. The ESOP previously held other securites prior to becoming an ESOP and as a result has the oldest participant accounts including various other investments such as stock. The question has arisen whether the benefits can be bifurcated and distributed under different rules depending on the type of benefit. The goal would allow for an earlier distribution for the non-employer stock and a later distribution time for the ESOP employer stock.

It would pass my first smell test-- those participants who have the old stock are getting improved benefit (the ability to get there benefit earlier) and those who only have ESOP benefits aren't losing anything (they never had the old stock). I know that there are plenty of plans that have bifurcated benefits, but usually this develops because anti-cutback rules are keeping an old benefit. This is different, because the bifurcation is being given to create a new benefit (the earlier distribution timing).

Are there any rules that would prevent this? The reasoning is mostly a matter of money-- there are only a small handful (less than 5) who have any interest in this old non-employer stock, but it is being managed by a company and management fees are being paid. The hope is that people will take it out and allow that part of the plan benefits to be distributed (or rolled over into an IRA or whatever).

Any thoughts would be welcomed!

[JRN]

This sounds okay to me. Where did the old assets come from -- presumably prior plan that was converted into an ESOP? If prior plan was a money purchase pension plan, you may have restriction on making in service withdrawals from that source. Otherwise, this seems okay. You could also consider charging the participants with the old assets their pro-rata share of the management fee, to perhaps encourage them to withdraw the old assets.

[Guest Grumbles]

This sounds okay to me. Where did the old assets come from -- presumably prior plan that was converted into an ESOP? If prior plan was a money purchase pension plan, you may have restriction on making in service withdrawals from that source. Otherwise, this seems okay. You could also consider charging the participants with the old assets their pro-rata share of the management fee, to perhaps encourage them to withdraw the old assets.

Thanks for the response. Yes the assets were from an older plan, but not a money purchase plan. My feeling is the employer will just keep paying for the upkeep until the final participants receive their benefits, but your idea is a good one if it comes down to that.

These sorts of issues where there is no clear guidance can be stressful; nothing worse then acting and finding out later that it was prohibited...