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Loan Payment with allocated cash?


Guest MaineERISA

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Guest MaineERISA

Employer contributions to ESOP alocated based on compensation. ESOP provides that trust assets may be applied to pay loan. Upon repayment, shares are released under the Principal and Income method and are allocated pro rata based on compensation in the year of the loan repayment. ESOP has special "value rule" for the use of allocated dividends applied to pay loan.

ESOP has substantial Employer cash contributions allocated to participant cash accounts.

Can ESOP use allocated Employer cash contributions to pay off loan?

If so, are shares released under the P&I method?

How are released shares allocated back to participants? pro rata based on current year compensation under the formula (this seems unfair if the accounts were charged pro rata based on account balance)?

Pro rata among participants based on the contribution debited from their cash account to pay loan? (value of shares returned to participant may not equal cash debited.)

Must participant receive shares of equivalent value to the contribution debited from cash account to pay the loan (similar to treatment of dividends)? i.e., the loan payment is considered an equal exchange of cash for shares.

Is this exchange considered reshuffling as described by the IRS?

Should plan have a provision that address use of cash account to satisfy loan?

Any comments/authority would be helpful.

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Guest MaineERISA

Thank you. I reviewed the link, but still have confusion. Assume employer start up ESOP in 2011 and makes a small contribution. In 2012, Employer enters loan arrangement to purchase shares. Employer makes contribution retroactive to 12/31/2011 (intended to be applied to the loan.) In 2012, employer makes loan payment with funds allocated to 2011. Is this permissible?

Based on a separate ESOP thread, it appears that if the contribution is made and the loan is repaid prior to the employer tax filing date, that the released shares can be allocated as of the prior year in lieu of the cash contribution (based on compensation for the prior year). I understand that the retroactive contribution cannot be used to pay any interest that accured in the subsequent year. In other words, based on the scenario above, the contribution allocated to 2011 can be applied to pay the loan in 2012, except for any interest that accrued on the loan in the 2012 plan year.

I do not read Reg. 54.4975-7(b)(5) to require the contributions (made under the ESOP to meet its obligation under the loan) to be applied in the current plan year to pay the loan, particularly since the regulations specifically state that "payments made with respect to an exempt loan by the ESOP during a plan year must not exceed an amount equal to the sum of such contributions [made to meet its obligation under the loan] received during or prior to the year less payments in prior years."

Following Marcus Piquet's comment in the referenced thread, the question succinctly is "Can prior years' contributions of cash that were originally designated a debt service contributions at the time of contribution be used to make payments on the exempt loan?" If so, how are the shares released and allocated?

I appreciate any comments.

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