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ESOP Sponsor Acquiring Property from Related Employer


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An ESOP sponsor is controlled by husband and wife, who are direct shareholders in the sponsor and are also the ESOP's trustees.  Is there a prohibited transaction or fiduciary breach if the ESOP sponsor leases or purchases property from a company that is in a controlled group with the ESOP sponsor?  The ESOP is not a party to the lease or purchase transaction, but it seems there is opportunity for abuse, for example, if the ESOP sponsor pays more than fair market value to lease or purchase the property.  The value of the plan sponsor is thereby diminished, to the detriment of ESOP participants, while the controlled group member is unjustly enriched.  Would an independent valuation of the leasehold interest or of the property offer protection against any prohibited transaction or fiduciary breach concerns? 

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As long as the ESOP sponsor (i.e., the company) is an operating company, its assets (including corporate cash it spends) generally are not considered "plan assets" that could give rise to a prohibited transaction. Also, the controlled group rules under 414 do not apply to prohibited transactions, but the definition of a "disqualified person" under section 4975(e)(2) includes rules that have a similar effect.

With that said, there is still risk if the transaction is not a PT but is otherwise harmful to the ESOP participants, e.g., state-law claims against the directors/officers for corporate waste, fiduciary claims against the ESOP trustees for failing to oversee the directors, etc. 

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