RLL

A vote by the ESOP participants is not required. The ESOP trustee or another ESOP fiduciary (who is independent of the President) must decide whether the ESOP will sell its shares and at what price. The purchase price must be no less than fair market value (as determined by an independent appraiser) as of the transaction date. The shares cannot be sold merely because the President has decided to buy out the ESOP; the ESOP must agree to sell. If the ESOP does sell its shares, it may be appropriate to merge the assets into the 401(k) plan.

It is not automatically a contribution ... deductible or non-deductible. A dividend is only treated as a contribution if it is recharacterized as such by the IRS under IRC section 415.

Cash dividends on ESOP loan suspense account shares must be allocated to participants' accounts (if not used for loan payments). The manner of allocating such dividends should be specified in the ESOP plan documents.

Appears likely to result in prohibited discrimination.

Check with The ESOP Association ( www.esopassociation.org ) and the National Center for Employee Ownership ( www.nceo.org ).

If the plan sponsor is, indeed, "cash poor," why are dividends being paid? Also, there may be regulatory restrictions on a bank's repurchasing its own shares. This appears to be a complex situation. You should seek advice from legal counsel experienced in both ESOP matters and bank regulatory issues.

Shouldn't the plan document be amended to clarify the manner in which the dividends will be allocated?

Check with The ESOP Association ( http://www.esopassociation.org/ ) and the National Center for Employee Ownership ( http://www.nceo.org/ ) .

Why didn't they just make a cash distribution from the ESOP? If the shares have already been distributed, why would the trustee want to now repurchase the shares? The trustee should not purchase the shares unless it's absolutely clear that the value has not decreased since the valuation date (as of which the put option price was set). If it's clear that the value has increased, it may be a good deal for the ESOP to be purchasing shares at the lower put option price.

http://www.nceo.org/main/pub.php/id/236/

It's not OK if the lender is the sponsor or another party in interest. Also, some state corporate laws provide that a corporation may not vote shares of its own stock.

A "separate" valuation may not be needed. An updated opinion from the appraiser, stating that the purchase price is not less than fair market value as of the purchase date, would be sufficient. There would likely be an added cost for such an update. If the company's financial situation and the state of the capital markets are such that value is declining, the use of the most recent year-end valuation should be OK, but the opinion update would still be required. If value is rising, the appraiser would have to determine an updated fair market value for the purchase price. If a higher value is used, there is an issue as to whether the distributees are entitled to receive the increased value. In either case, it is preferable for such a transaction to occur as soon as possible after the year-end valuation. For these reasons, it's much better for the company not to purchase the shares from the ESOP.

It's better to avoid having the company buy shares directly from the ESOP. In order for the PT exemption under ERISA section 408(e) to be satisfied, the purchase price must be no less than the fair market value of the shares on the purchase date. In a closely held company, determining compliance with the fmv requirement on an up-to-date basis can be a problem. On the other hand, when shares are distributed to participants by the ESOP and then the company buys the shares from the distributees, the purchase price may be determined as of the prior year end.

Distribute benefits in shares and have the company repurchase the shares from the distributees.

If diversification is effected by distributing shares to the participant or transferring shares to a 401(k) plan, there is no need to value the shares. If the shares are sold to provide cash for diversification, there also is no need to value the shares. If the publicly-traded shares are converted into cash within the ESOP (without a sale, etc.), the plan document should specify the date as of which the value is determined. It seems that the year-end value is not appropriate if diversification is effected 3-6 months after year-end, when there may have been a meaningful change in value since year-end. A current value should be used when the shares are publicly-traded.

Check NCEO.org. I recall that a relatively recent "Employee Ownership Update" column by Corey Rosen addressed this.

IRC section 409(h)(5)(B) requires that the company provide "adequate security" for any installment balance in connection with the payment for shares repurchased under the put option. The shares are generally not considered to be "adequate security" for this purpose. Actual assets of the company or a surety bond should be provided as security. The repurchased shares are either held as treasury shares or revert to the status of authorized but unissued shares (as provided under applicable corporate law).

Assuming that the former 25% shareholder is otherwise eligible, he/she is entitled to share in the allocation of any shares that are acquired by the ESOP from the employer corporation or from a selling shareholder who did not elect 1042 treatment with respect to that sale. IRC Section 409(n)(1) applies only to shares acquired in a 1042 sale. The former 25% shareholder is also entitled to share in the allocation of any shares that are acquired by the ESOP (from an unrelated shareholder) in a 1042 sale that occurs more than one year after he/she ceased to be a more-than-25% shareholder. See IRC Section 409(n)(3)(B).

mbozek --- It appears to me that NUA treatment under IRC section 402(e)(4)(B) is available to a "lump sum distribution" as defined in section 402(e)(4)(D). This would include an individual who has received the distribution on account of separation from service even if he/she has not attained age 59-1/2.

The ESOP regulations were adopted in 1977. The put option provisions of section 409(h) were added to the IRC in 1978. Accordingly, the inconsistent provision of the regs (the 15-month put option period) was superseded and has not been applicable for the last 30 years.

The last clause of IRC section 409(h)(2)(B)(i) allows an S corp ESOP to distribute shares subject to a mandatory immediate sale back to the company. This provision was added to the IRC after the ESOP regs were adopted; so the inconsistent provision of the regs has been effectively superseded. The loan that Tot first described likely could be structured as an interest free loan from the company to the ESOP used to pay benefit distributions in cash. There is a PT class exemption that permits such loans.

The company or the ESOP may be interested in purchasing the shares, even though there are no put option rights. Also, there may be current employees that would purchase the shares.

Check with The National Center for Employee Ownership at www.NCEO.org/

I stated above that "This must be done with great care and should be done only with advice of legal counsel experienced in ESOP matters."

Under many circumstances, an ESOP can be "converted" into a profit sharing plan; and various ESOP features (such as the 409(h) distribution requirements) can be eliminated, per IRC section 411(d)(6)© and the corresponding provision of Title I of ERISA. This must be done with great care and should be done only with advice of legal counsel experienced in ESOP matters. The IRS has been issuing favorable determination letters with respect to such plan changes for many years. The biggest concern is the proposed redemption of employer stock. The employer may not unilaterally decide to redeem the stock. The decision as to whether (and upon what terms) the ESOP will sell its stock to the employer should be made only by an ESOP fiduciary that is independent of the employer. The transaction price must be not less than fair market value, as determined by an independent appraiser (if the stock is not publicly traded), on the date of the redemption. In addition, attention should be given to the delicate task of communicating this change to the participating employees.