RLL

Doesn't "smm" stand for "summary of material modifications" ? What your client wants to do is clearly permissible under certain circumstances. Check out the 1977 ESOP loan regulations, at Treas. Reg. Section 54.4975-7(B)(10) and DOL Reg. Section 2550.408b-3(j), which provide, in part, as follows: "...The put option must permit a participant to put the security to the employer. Under no circumstances may the put option bind the ESOP. However, it may grant the ESOP an option to assume the rights and obligations of the employer at the time that the put option is exercised..." Although these regulations pre-date the 1978 addition of Section 409(h) to the IRC, they have not been modified by the IRS or DOL. Note, however, that a decision for the ESOP to purchase the stock (when a put option is exercised) is subject to the fiduciary rules of ERISA Section 404(a)(1).

Kirk --- If you were that employee, I doubt that you would have accepted the appointment as plan administrator!

I agree with you....it assigns to the employee, as "plan administrator" under ERISA and the IRC, responsibilities and exposure to personal liability which probably should remain with the employer. You may want to ask why (or upon whose advice) it was done. I wonder if the employer and the employee understand the significance of this designation.

Sounds like the seller may have agreed to guarantee the company debt incurred to finance the ESOP buyout. Such a guarantee is not uncommon in the case of ESOP buyouts in closely-held companies. If financing can be arranged without a seller guarantee, the seller would not be liable for the ESOP debt in the case of bankruptcy (unless the court were to find that the buyout constituted a "fraudulent conveyance").

Those distributees would have previously elected to sell the stock by exercising their put options. In addition, as the employer would be defaulting on the repurchase payment, the stock would be of questionable value at that time. Why would a company provide distributees with more options than are required under these circumstances?

If there is a bond to provide "adequate security" for the repurchase notes, why bother with a pledge of the repurchased shares? Such pledge unnecessarily complicates matters (such as raising the valuation issue) and requires additional paperwork, etc., for no real benefit to anyone (except, perhaps, the lawyers who designed the arrangement and, thus, created the need for additional documentation, etc.).

The 25% deduction limit will also be available to the extent that the company has pre-1987 "credit carryovers" available under IRC Section 404(a)(3)(A)(v).

The repurchased shares do not constitute "adequate security" under IRC Section 409(h)(5)(B), so the company appears to be violating the ESOP put option requirement. The shares should not be considered as outstanding for valuation purposes unless the company is in poor financial condition and there is a likelihood that it will be unable to meet its obligations under the repurchase notes.

Bristol -- Every time you come back with a posting on this matter your story changes and the problems get worse! As a minimum, the appreciation attributable to stock in the "separate account" would probably be allocable to remaining participants' accounts, unless the ESOP plan document provides for some other treatment (and such document provision has been the subject of an IRS determination letter). If the periodic "advances" have not been clearly documented as loans to the ESOP, they very well might be characterized by the IRS as employer contributions which have not been allocated. The problems here are far too complicated to expect specific "correction" advise in a forum such as this. I recommend that the employer retain legal counsel with extensive experience in fixing ESOP administrative screw-ups.

The ESOP plan document should specify which account(s) are used to satisfy the diversification requirement of IRC Section 401(a)(28)(B). IRC Section 401(a)(11)© exempts the money purchase plan portion of an ESOP from the J & S annuity requirement which is generally applicable to pension plans, so spousal consent is not required with respect to the ESOP diversification election (unless otherwise provided in the plan document).

Once the 133 loan has been repaid, it appears that there is no sanction under the IRC or ERISA if the ESOP were amended to delete the voting pass-through required under Section 133(B)(7). Voting rights are not a "non-terminable" right under the ESOP requirements of Reg. Section 54.4975-11. Of course, the employer would have to notify the ESOP participants that voting rights have been taken away.

For a closely-held company ESOP, the valuation of company stock is needed as of each date the ESOP acquires stock. For a publicly-traded company ESOP, SEC registration is generally not required for the ESOP to purchase company stock unless employee after-tax or 401(k) contributions are to be used to acquire stock.

The 10% money purchase contribution to the ESOP is not required with respect to a participant who is not eligible to receive an allocation by reason of IRC Section 409(n). A contribution which is not allocable under the terms of the plan document (such as one which would violate Section 409(n)) is not payable under a money purchase contribution formula. Accordingly, there is no violation of IRC Section 412.

Doug --- From the excerpt which you cited previously, it appears that PLR 9001035 interprets provisions from Section 1042 which were in the 1954 IRC. Those "prohibited allocation" provisions were superseded by Section 409(n) of the 1986 IRC. You will note that current IRC Section 1042(B)(3) does not include "prohibited allocation" provisions. Accordingly, the IRS position in PLR 9001035 may no longer be applicable. A distribution of shares followed by an ESOP repurchase is substantively different from a cash distribution. The distribution of shares in a lump sum has different tax consequences to the recipient (relating to treatment of net unrealized appreciation). The repurchase by the ESOP results in a new cost basis to the ESOP. There also may be different considerations for a fiduciary in deciding on the form of distribution and whether the ESOP should repurchase.

Accountants (unlike lawyers) sometimes can make things seem so simple and straightforward! If only it were the case more often and with more accountants!

It's not your problem as a TPA. The company is probably the party responsible for interpretation of the ESOP plan document, and the company's legal counsel has advised the company. You're merely following their (presumably, written) instructions. The approach sounds reasonable. Not every detail of plan administration must be specified in the plan document. This looks like an example of poor repurchase obligation planning.

There is no "plan" or "trust" under IRC Section 401(a) if no contribution is made (by the due date for filing the sponsor's federal income tax return) for the initial plan year. A trust requires "corpus" (assets) and Section 401(a) generally requires a "trust" (except for certain annuity plans and custodial accounts) in order for there to be a tax-qualified plan. Accordingly, no 5500 "annual return" is required under the IRC. It is possible, however, that a 5500 "annual report" may be required if there is an employee benefit plan under Title I of ERISA....but I doubt it under these circumstances.

COOL ????

I have no cite.....IRC Section 409(n) is clear to me. If the PLR says otherwise, the IRS was taking a position that is not supported by the statute. That does happen from time to time....but only the party to whom the PLR is issued may rely upon it. It's interesting that the excerpt from the PLR refers to the 1954 Code. Aren't we now dealing with the Internal Revenue Code of 1986? Perhaps the situation in the PLR was dealing with a 1042 transaction which occurred prior to the 1986 amendments to Section 1042 [which included placing the "prohibited allocation" provisions in new Section 409(n)]. Maybe the IRS holding in the PLR would not be applicable when dealing with the restrictions under Section 409(n).

Shares that are "tainted" under IRC Section 409(n) do not lose that "taint" when they are "recycled" within the ESOP, either by reason of cash distribution/reallocation or forfeiture/reallocation. Shares that are distributed and repurchased by the ESOP will no longer be "tainted" under Section 409(n).

Hi TAS17 --- Alternative payees....yes. Beneficiaries....no, unless it's permitted under the plan document (the law does not require it).

The California tax law was conformed to include IRC Section 1042 tax-deferred treatment. But you may be required to file a separate election with the California income tax return.

Hi PJK --- Reg. Section 1.415-6(g)(4) provides the special rules for dealing with the increased dollar limitation that formerly was available to ESOPs under IRC Section 415©(1)(A). That provision of the Code was repealed by Congress (in the late 1980s) and is no longer applicable.

Kirk --- It's more than just a plan document issue. Multiple plans can be administered together and can be combined under one trust, one SPD can be used (if desired), one 5500 (and audit) can cover the combined plans, etc.

gkaley --- When a contribution is made to an ESOP in cash, there is no valuation issue....the amount of cash contributed will become IRC Section 415© annual additions to participants as of the allocation date....even if the cash is invested, generates earnings and results in allocations to participants in amounts greater than the amount of contributed cash. With regard to your potential arrangement, you now have me confused. In order to try to clear this up, here are my responses: 1. The annual addition is $50 because the contribution was $50. The value of the stock is not relevant under Section 415 because stock was not contributed. 2. All income of the ESOP trust must be allocated to participants' accounts at least annually. 3. The amount actually allocated to the participant would be the $50 contribution (which is also the annual addition), plus the $2.50 income. But how could the money market investment of $50 earn $2.50 in less than 6 months? That's better than a 10% annual return! Under your facts, the change in the value of company stock is not relevant. The ESOP doesn't have stock until the contributed cash (and earnings) are used to purchase company stock. 4. There is no prohibited transaction....the ESOP has merely received a cash contribution and invested it in a money market fund. No company stock has been purchased by the ESOP and the ESOP has not suffered any loss. 5. This conclusion is obvious....unless you've misstated the facts. There is no need to look at any PLRs for this. Have you left out a step? Has the ESOP purchased company stock? Was the June contribution made in shares of company stock? If cash is contributed in June, what relevance is there in looking at the then value of company stock?