KEC79

Small Amount Exception for Right to Distribution in Stock?

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ESOP plan document of a c-corp provides for automatic distributions under $1,000 and automatic rollovers between $1,000 and $5,000.  Is anyone aware of any "small amount" exception (whether $5,000, $1,000, or $200) to the rule that ESOP participants are entitled to receive distributions their company stock account in stock?  It appears that the company is making all automatic rollovers of amounts under $5,000 in cash, and all automatic distributions of amounts under $1,000 in cash, and is not offering any of these participants the right to elect stock.  Recordkeeper indicates this is their common practice.  I tend to think that when they send these people the notices they should at least be telling them they have the option of taking the distribution in stock...  Plan document has a determination letter but it is vague on this point and doesn't explicitly say what the form of these automatic distributions/rollovers will be.

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The document shouldn't be vague on this.  If it is a C corp it has to allow the person to ask for stock UNLESS  the corporate charter restricts ownership of the stock to the ESOP or employees.  The plan provision ought to say something about the charter.  In fact if you have the document in pdf or Word form you ought to be able to search on the word "charter" and find the provision. 

But if it is a force out is the person asking for a stock distribution?  It seems like most ESOP documents allow the plan administrator discretion unless the participant demands stock. 

Are you saying this plan forces people out and NEVER sends distribution form if their balance is <$5k?  I have seen plans that do that with <$200 balances but even back when I worked 4k/PSP plans I don't think I have ever seen a plan that doesn't at least send forms and give you a chance to rollover without withholding.  If they are sending no forms I am less sure what to say.  Are the people informed of the right to demand stock in the SPD?  How does one demand if never given forms?  If this is what you are saying I see your problem and I am not giving great answers. 

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Thanks, ESOP guy.  They force people out and send distribution forms in advance that explicitly say they are entitled to distributions in CASH, and that such amount will be distributed/rolled over in the absence of direction from the participant.  There is no mention of being entitled to a distribution in stock.  It sounds like you agree with me that this is not okay and that the participants should at least be told in that set of paperwork that they have a right to a stock distribution.  I think the recordkeeper thinks there's an exception for "small amounts" but I don't believe there's any basis for that.

Thanks, Peter - unfortunately 409(h)(2)(B) doesn't apply to us. Ownership isn't restricted to employees/ESOP, and client is not an S corp. 

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There is an exception for fractional shares and I have seen cases where the company kept the value per share very high at $10,000 or more, for example, with the result that they could CASH out of small balances. 

Other than that, as others noted above, there is nothing specific that permits cash distributions only based upon the size of the account. Also, I know that the IRS has ESOP distributions on its hit list these days in their audits.

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