Tot

Thanks for all the valuable insights.

Assuming I can get passed the PT because of the plan asset exemption, my concern was whether the transaction could still be a PT because of the direct “ or indirect” language in the statute.

If the ESOP exception to the plan asset rule doesn’t provide relief from the PTs, isn’t every transaction between the ESOP company and its employee-participants, such a paying base pay (which better not be unreasonable compensation), a PT? There are some ESOP cases where the plan trustees and company management are the same individuals and participants have been able to successfully assert breach of fiduciary duty when management is paid excessive compensation, but curiously these cases don’t even discuss such transactions also being PTs.

The current loan is NOT an "exempt loan" as defined in the IRS regulations. Rather, it is a commercial term loan between the ESOP company and a bank, secured by real estate owned by the ESOP company. The outside director is financially well off. Company management is considering asking the outside director to take over secured loan, but with a lower interest rate than it can get with a commercial lender (i.e., the proposed new loan would be more favorable to the ESOP company than any loan it can obtain from a commercial lender), but company management was concerned that such transaction is a prohibited transaction. My thought was that the lending transaction between the outside director and the ESOP company - not with the ESOP trust - is not considered a PT because the plan asset regulation does not consider assets of an ESOP company to be assets of the ESOP.

A 100% owned ESOP company has some outstanding debt with an unrelated bank. A outside director of the ESOP Company is willing to refinance the loan at a lower rate. What legal authority prevents this transaction from being an indirect prohibited transaction between the plan and a party in interest? I'm thinking the ESOP exception to the plan asset rule set forth in 2530.3-101(h)(3).

Following a corporate acquisition, the profit sharing plan of Target merges into the profit sharing 401(k) plan of Buyer. Prior to plan merger, participants of Target profit sharing plan filed beneficiary designation forms. Buyer's profit sharing 401(k) plan is silent as to the effectiveness of these beneficiary designations. Are these beneficiary designations effective with respect to Buyer's plan and, if so, participants' entire interest in Buyer's plan (i.e., profit sharing account plus 401(k) accounts accruing post-plan merger), only profit sharing accounts in Buyer's plan (i.e., the profit sharing account from Target's plan plus the profit sharing account accruing post-merger), or only the profit sharing account transferred from Target's plan? Because IRC section 414(l) provide that a merger of plans is the combining of plans into a single plan, it would appear that by operation of law the beneficiary designations made with respect to Target's plan remain in effect under Buyer's plan, which is post-merger the combination of two plans, until a new beneficiary designation is filed. Thoughts?

A large employer is acquiring a small employer in a stock sale. Following the sale, the large employer is going to liquidate the small employer company and, thus, causing it assets and employees to merge into one of large employer's subsidiaries. Small employer has a group health insurance plan. Small employer wants to continue to offer that insured plan following the closing to its employees participating in such plan. The small employer plan provides more generous benefits than the large employer plan. The large employer is concerned that the small employer group health plan doesn't comply with the ACA requirements applicable to a large employer plan, including the minimum value requirements of a large employer plan. Are there any transitional rules (similar to 410(b)(6)©) that would allow the large employer to continue to provide only this coverage to those employees or must the large employer make an offer of coverage to these employees under its group health plan (and also allow these employees to elect to keep their current small plan) to avoid the $3,000 excise tax that would be incurred with respect to these employees?

Assume the following: (i) a QDRO for defined benefit assigns 100% of the participant’s accrued benefit to the alternate payee, (ii) the DB plan provides as a death benefit the qualified preretirement survivor annuity but no ancillary death benefit, (iii) the QDRO fails to treat the alternate payee as the participant’s surviving spouse, but it does provide that the death of the participant will not have any affect on the alternate payee’s assigned interest, and (iv) the participant dies before benefits commence to be paid to the alternate payee. Is the alternate payee entitled to anything (i.e., that is, doesn’t the alternate payee forfeit the assigned interest because only the survivor portion of the QPSA is now available to be paid as a benefit and the alternate payee failure to be treated as the participant’s surviving spouse leaves the alternate payee with no right to the survivor benefit)? If the alternate payee is entitled to something, is it the entire accrued benefit (which doesn't seem right because if they were still married, the alternate payee would only be entitled to the survivor benefit under the QPSA) or the actuarial equivalent of the survivor portion of the QPSA?

Can a plan provide that an eligible employee enters the plan on the earlier of (i) crediting of one year of service and attainment of at least age 21, or (ii) attainment of age 30?

1. Call option prohibition – See 54.4975-7(b)(4) (Except for a right of first refusal or put right as described in the regulation, “no security acquired with the proceeds of an exempt loan may be subject to a put, call, or other option, buy-sell or similar arrangement while held by and when distributed from a plan, whether or not the plan is then an ESOP”) 2. Right to demand securities. 409(h)(1) provides the participant with the right to demand that ESOP stock be distributed to him, and if the stock is not publicly traded, that he has the right that the employer repurchase the stock under a fair valuation formula. 409(h)(2)(B) is an exception to this rule for ESOP sponsors that are either S corps or those whose formation documents restrict the ownership of substantially all securities to employees or a qualified plan. Under the exception, the participant is not entitled to demand securities from the plan. However, also under the exception the plan may allow the participant the right to demand securities but such securities must be subject to a requirement that they be resold to the employer under terms which meet the requirements of general rule (i.e., repurchased under a fair valuation formula). It wasn’t (and still isn’t despite RLL’s citation) apparent to me that the exception allowed a plan to require that the shares be resold immediately upon distribution (an immediate call right). My reading of the statute was that the participant had the right to exercise this repurchase obligation, except that if the S corp status would be busted or entity formation documents would be violated (for example, the 100 shareholder limit would be exceeded or less than substantially all securities would be held by employees), then the employer/plan could have a provision that allowed them to exercise the right to repurchase the shares under a fair valuation method. 3. The potential loan to the ESOP would be loan from a bank (i.e., a non-disqualified person). It would not be used to acquire shares held outside the plan. Rather it would be exchanged for shares allocated to the account of participants requesting a distribution. Because it would not be used to acquire shares, it could not meet the technical requirements of an exempt ESOP loan under -7(b)(4) (unless that reg could be read to allow a loan to acquire shares allocated under the plan and that are not distributed). It is expected that the bank would want a guarantee of the loan by the S corp. However, such a guarantee would cause the loan to be a prohibited transaction for which an exemption is not available (other than going for an individual PT exemption).

I believe that RLL is referring to PTE 80-26, the latest version of which was published in Federal Register Volume 71 Number 67, April 7, 2006. I'll attach a copy. I have a couple of concerns with vsaper's approach, and I'd love to hear a response. Any time the ESOP is acquiring shares with a loan you've got to have a fairness opinion. At least with the professionals that I work with, the extra valuation and legal fees to do a new transaction potentially every year would get very expensive. Also, every additional leveraged purchase adds more recordkeeping complexity and therefore more opportunity for errors. That's why I like to see corporate redemptions followed by recontributions by the company to the trust. Very simple, no fiduciary risk, no transaction fees, no fairness opinion. Most appraisers I've worked with are willing to "smooth out" the antidilutive/dilutive effect of the changing number of shares oustanding when they understand that the transactions are part of a long-term plan to return all shares to the ESOT. One concern would be that the use of the redemption method, as opposed to the recycling method, could cause 409(p) problems.

If plan is amended to provide for distribution of shares, isn't it possible that 100 (75 in past) shareholder limit will be busted? As I read 409(h), 4975-7(b)(4), and Rev. Proc. 2004-14, a participant has right to put shares distributed to company/esop, company (and if esop desires) has obligation to repurchase such shares, and in the event shares are distributed in direct rollover to IRA (i.e., an impermissible shareholder), company/plan can call immediately to avoid disqualifying S corp. status. What gives company/esop right to call shares distributed to participant directly (i.e., an eligible S corp shareholder) (I thought the -7 reg prevented a call right with respect to financed shares, and I thought that the right to repurchase the stock immediately upon distribution would be considered a call or similar right)?

S Corp has looked at reshuffling allocated shares, but such reshuffling still does not allocate enough shares to newly-hired employees. So S Corp would like its ESOP (wholly-owned S Corp) to allocate shares of retiring participants to be based on compensation. However, the amount shares of retiring participants is expected to be greater than the amount contributed to the plan during a single year. Thus, S Corp would like to spread the allocation of shares of retiring participants over a few years. Because of this, instead of exchanging shares for amounts in the ESOP’s cash accounts, S Corp would like ESOP to obtain a loan and purchase the retiring participants’ allocated shares with proceeds thereof. Loan would be secured by shares acquired. S Corp would then contribute an amount sufficient to repay loan over term. As loan repayments are made, shares would be released from encumbrance under a share release formula (based on principal and interest) and allocated to participants’ accounts based on plan year compensation. The Plan only permits distribution of cash. If the ESOP, however, allowed stock to be distributed, ESOP could repurchase the stock with an exempt loan and easily accommodate S Corp’s desires. However, because stock is not actually distributed, we are concerned that the loan to the ESOP is not technically an “exempt loan” under 4975 because the loan proceeds are not used “to acquire” employer stock or repay a prior exempt loan. Despite this, we believe the ESOP could still obtain the loan, purchase the shares, and provide a security interest to the bank in the shares. The only unusual aspect of the loan (at least in our experience) would be that the neither the S Corp nor any other disqualified person could guarantee the loan (otherwise it would be a prohibited transaction without the benefit of the statutory exempt loan exemption). Any thoughts about the loan being exempt, and therefore, S corp being able to provide a guarantee?

Another argument that plan can eliminate these voting rights is that in the 4975 regulations, when the IRS wants the rights to continue to exist following a change in facts, the regs so provide (i.e, the nonterminable protection and rights). Although different, but by analogy, if plan wasn't required by section 133 to provide complete pass thru voting but the provisions of the plan nonetheless did, couldn't these extraordinary rights be eliminated so that only the statutory voting rights are provided?

Private company ESOP was funded with a section 133 loan. Section 133 required pass thru voting on all matters. Loan has been repaid in full (i.e., no 133 exclusion is now being claimed). Can plan now eliminate pass thru voting on all matters and limit it to only those matters described in 409(e)(3) (merger, etc.)?