Jump to content

ESOP distributions


Recommended Posts

I administer an ESOP that states that distributions will be made in the form of company stock in the case of Participants who die, retire or become disabled, subject to the requirement that the stock be sold to the company or back to the Plan at FMV. The Sponsor's articles of incorporation restrict the ownership of shares to current employees and the Trust, and the Sponsor also converted from C-Corp to S-Corp about two years ago. To date, participants who have terminated due to retirement or disabilty, as well as spouse beneficiaries have been paid by check directly from the Sponsor - such check representing the distribution of shares and the immediate repurchase of those shares by the company. These participants/beneficiaries may then roll to IRAs.

However, I now have a non-spouse beneficiary who would like to roll to an inherited IRA. This must be done through a direct rollover/Trustee to Trustee transfer. If the same procedure is used, and a proceeds check is issued from the Sponsor to the beneficiary IRA, does this satisfy the Trustee to Trustee transfer rule? Should the Plan receive a put agreement from the IRA Custodian to substantiate the transaction?

Thoughts, anyone?

Link to comment
Share on other sites

What I'd do is a slight change in procedure. The ESOP distributes the shares to the inherited IRA (with a stock certificate issued), and the company immediately and automatically buys the shares back with the check. The stock certificate never leaves the company. As soon as the certificate is created, it gets cancelled, and the check gets mailed.

This gives a distribution from the ESOP in shares, the distribution is to the inherited IRA, and the buy back is a separate transaction in accordance with the stock ownership limitations.

The plan document may already have a clause requiring the company's immediate and automatic purchase of shares distributed by the ESOP.

Link to comment
Share on other sites

The ESOP document should explicitly describe the automatic put rather than implement it implicitly. The cash can be directly rollover over. I can't remember the details of the IRS letter ruling on the subject, which may have been about an S corporation, but the IRS reviewers don't have any problem with the shortcut when a cash distribution can be required. Note that the determination letter does not cover the the rollover.

Link to comment
Share on other sites

  • 5 years later...

To revisit this topic,

Per GMK:  "What I'd do is a slight change in procedure. The ESOP distributes the shares to the inherited IRA (with a stock certificate issued), and the company immediately and automatically buys the shares back with the check."

In this scenario, does the IRA Custodian itself (such as Vanguard or Fidelity) have to "accept" the stock and sign the put option, or can the participant make that election?  As long as the stock certificate which is distributed and immediately cancelled indicates the IRA Custodian/Inherited IRA Account, does the participant rollover and put election suffice?

 

 

 

Link to comment
Share on other sites

You are not fully grasping what GMK and QDROphile are saying.  The document and form should say the Put back the company is immediate and MANDATORY.  Since it is mandatory there is no signature.  I mean what happens if they refuse to sign?  The stock still goes back to the company.  I would change the form to disclose that fact.  It should say something to the effect, "by signing this form you consent to the distributions and acknowledge the shares will be immediately sold back to the plan sponsor via a required Put Option."

Once again in this set of facts I don't think there needs to be any signature for the Put Option to happen- it is required and it will happen. 

Link to comment
Share on other sites

Unless there is an IRS ruling to the contrary, the IRA cannot be the owner of S corp stock, even for a nanosecond, because that will blow the corporation's S election. 

Link to comment
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
 Share

×
×
  • Create New...