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Transfer to 401(k)


Guest JMN
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Guest JMN

Where employer stock is permissibly liquidated and segregated following a participant's termination of employment, can the employer transfer the cash investments to a 401(k) plan or must those funds be held in the ESOP, or must the participant consent (assume vested balance exceeds involuntary distribution threshhold)?

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Consent is not an issue in segregation as no benefit payment is being made.

This isn't the strongest answer you are going to get.

I am unaware of anything stopping you from putting the money into the 401(k) plan. (and given the new disclosure rules if you give the part investment control in the ESOP it is a pain)

This however does raise one of my most common questions regarding segregation. Why are you doing it? If the sponsor is willing and able to put cash into the plan to buy out a person's shares why not just cut the person a check? Why go through the motions of putting it in the 401(k) plan? The reason most ESOPs delay payment is because they need to save the cash for loan payments. But in this case the cash exists, it is in a plan-- but one is just unwilling to give it to the former employee.

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Guest JMN
Consent is not an issue in segregation as no benefit payment is being made.

This isn't the strongest answer you are going to get.

I am unaware of anything stopping you from putting the money into the 401(k) plan. (and given the new disclosure rules if you give the part investment control in the ESOP it is a pain)

This however does raise one of my most common questions regarding segregation. Why are you doing it? If the sponsor is willing and able to put cash into the plan to buy out a person's shares why not just cut the person a check? Why go through the motions of putting it in the 401(k) plan? The reason most ESOPs delay payment is because they need to save the cash for loan payments. But in this case the cash exists, it is in a plan-- but one is just unwilling to give it to the former employee.

I appreciate your input. Let's instead assume that the cash investment results from periodic rebalancing rather than following termination of employment, so that benefits are not yet distributable. Can the cash portion be transferred without the participant's consent?

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Once again not the strongest answer, but I am not aware of any reason you can't do it.

Although like last time I am hard pressed to see the advantage. Most ESOPs need or want the cash for benefit payments and once in the 401(k) plan I have never seen it go back without consent.

If you don't mind me asking why do you want to move the cash to the 401(k)?

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In the second scenario the transferred cash would have to remain subject to certain ESOP terms, such as the right to receive employer securities (unless an exemption applies). The cash might be transferred because the other plan is better suited for investment of amounts that are not employer securities pending transfer back to the ESOP for investment in employer securities in a future rebalancing or distribution in accordance with ESOP terms.

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I would defer to QDRO's answer. It sounds like has looked into this question more then I have.

I haven't because I can't think of a really good practical reason to make such a transfer. If the ESOP is ever going to need the money have the trustee control the investments. That doesn't require the new disclosures and really doesn't add that much burden to the people running the plan. The reality is that was how most 401(k)s and PS plans were ran not that long ago.

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I agree with ESOP Guy about the practicalities. I am skeptical of arrangements that involve transfers, except diversification, and diversification would usually be better as a distribution and direct rollover rather than a transfer. Some of the consideration regarding distributions depends on one's conclusion about whether a next-year distribution provision can be amended to provide instead for distribution after five years following termination.

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