smm

Additional thoughts on this question are still appreciated. I looked at the regulation that is cited by RLL. The regulation applies to securities that are acquired with an exempt loan - this is not a leveraged ESOP. I also realize that the regulation was issued before 409(h). Does this change the result?

Thanks for your reply. I reached the same conclusion that you did, but thought perhaps that I could distinguish between a privately held company and NASDAQ securities that are legended for a short period of time. Wishful thinking. I did consider deferring distributions as a way around the problem. I think that will work.

Privately traded company has an ESOP. Distributions are of course, subject to the put requirement in 409(h). Company is being purchased by a publicly traded company. Net result after transaction closes is that the ESOP will hold shares of a publicly traded company. Put option no longer relevant because shares are "readily tradable on an established market". Query: For the first 12 months following the sale, publicly traded stock will be "restricted" under the securities laws and cannot be sold in the public market. After that, stock is freely tradable. Are the shares subject to a "put" whicle they are restricted? Thanks.

The current vesion of the model amendment is in IRS Announcement 2001-18. There was also a version in the proposed regs., but this version supercedes it because the original version contained a typo. It is my understand that you have to adopt the model amendment, but I guess if you do your GUST amendment now, you can include it in the GUST amendment.

Does anyone have the telephone number for Covington. Thanks.

In my experience, the IRS will not assess any penalties if the taxpayer files all of the late 5500s at one time and accompanies the returns with a Statement of Reasonable Cause Requesting a Waiver of the Penalties. Obviously, there are no guarantees. You are asking for problems if you do nothing and wait for the IRS to raise the issue on audit.

Thanks for the advice. I have a situation now where the client screwed up and took the MRD last week (instead of prior to 12/31/2000) He will include the tax on his 2000 income tax along with a note so the tax will be timely paid. I am fairly confident that the IRS will waive the penalty but don't want to have to pay twice (my client wants the use of his money - I don't blame him).

The instructions for the Form 5329 require you to send in the tax. If the IRS approves of your reason, they will return the money. Has anyone ever sent the form in without the tax (especially when the MRD has been corrected and the tax paid)? Any thoughts??

Does this mean that if a spouse is 15 years younger than the participant, I can, (a) recalculte the participant's life expectancy, (B) recalculate the spous's life expectancy, or © both? If so, does it matter anymore? I have to read the regs again (who doesn't), but I thought it said that even if a participant's life expectancy is recalculated, it is no longer reduced to 0 if he dies. I may be mixing up a few things, but any guidance would be helpful.

Perhaps I've missed this, but the regs. permit a participant who has a spouse that is more than 10 years younger than him (or her) to use the joint life expectancy tables instead of the new "single" table for all participants. Does such a participant still have the option of recalculating his/her life expectancy or does it mater anymore. What about the spouse.

In November, 1999, Employer approached Employee A and offered Employee A the opportunity to defer a significant portion of his 1999 compensation to a future date. If Employee A agreed to the deferral, Employer would triple deferral and use to purchase stock options for Employer's publicly traded stock. Employee agreed to the deferral, signed election in 11/99 and now owns stock options. Question: Was initial election to defer 1999 compensation timely made or was Employee A already in constructive receipt of the income at the time of the election.

Many years ago, a 501©(3) entity sponsored a 403(B) plan with employer contributions. There was a document and the plan complied with all of the applicable regs and rules. The plan was frozen and no contributions have been made to the plan for years. Employer has since adopted a 401(k) plan which is running nicely. Employer wants to allow employees to make deferrals to a 403(B) program. Primary reason is that some employees have asked to be able to. Second reason is that some employees get refunds of their deferrals to the 401(k) plan each year because of ADP testing. 403(B) would be open to all, employees can select vendors, etc., etc.....Is the "new" 403(B) program exempt from ERISA (assuming we meet all of the requirements) or is it somehow subject to ERISA because of the old plan or some other reason. Thanks

I agree with you and in an attempt to keep my message short, didn't say everything that I would want to say (one of the problems with message boards). The only time there is a potential for manipulation is if the employer does not make a loan payment, therby triggering other provisions in the plan that might require the sale of stock. . Also, the second scenario is not limited to a tender offer, a sale to a third party might also be permissible. However, getting back to my original question, I am still uncomfortable to having a provision in the stock pledge agreement that includes "cash and non-cash proceeds and products of the stock" as collateral because unlike Kirk, I'm not sure that earnings was intended to include such proceeds. I represent one of the trustees. Perhaps I can get an opinion of counsel for the ESOP and the Company that it is ok. Perhaps I'll reconsider the provision in the ESOP that requirs the Employer to buy back collateralized shares in the event the Employer fails to make a plan conrtibution sufficient to make the loan payment.

I cut myself off. Second, I don't have a problem if the Trustee sells the shares to 3rd party in a tender offer after the Employer has made several years worth of contributions to pay off the loan (there is a recent PLR regarding this), but I am uncomfortable about having this language in my stock pledge agreement. The plan that I am reviewing also gives the Trustee right to require the Employer to buy back collateralized shares on demand.

I guess one could argue that "earnings attributable to collateral" includes proceeds derived from the sale of the collateral, but based on my reading of everything, that is not what was intended by the terms. First, the purpose of the exempt loan is to be primarily for the benefit of the ESOP participants. If the document permits the trustee to sell the pledged shares to a third party or the employer in order to pay off the loan, the employer is essentialy manipulating the loan and the loan is not primarily for the benefit of the ESOP participants. This opinion is in the ESOP audit guidelines in Announcement 95-53.

I am reviewing a stock pledge agreement for a leveraged ESOP transaction. The employer is the lender. The agreement states that on default, the Pledgor's (ESOP) voting rights to the stock that is held as collateral for the loan will cease and the Company will then be able to vote the shares. Obviously, the ESOP does not say this. Other than simply smelling bad, does this violate 54.4975-7(B)(6) (or any other section that you can think of?) The stock pledge agreement also provides that the loan is secured by "cash and non-cash proceeds and products of the stock"...I know that this is bad. Thanks.

I'm setting up an ESOP for a company. The client wants to know if the participant can "put" the shares to the ESOP in addition to the employer as required by 409(h). I did some research and the legislative history and a few secondary sources suggest that this is permissible. I'm uncomfortable with the idea. Any thoughts? Thank you.

IRS officials at the ALI-ABA conference in Washington, DC this month confirmed that this was an audit area. I would not lose sleep over it. I would conduct a self audit and if there are issues, evaluate the cost of self-correction under TVC. The purpose of the TVC and other amnesty programs is to encourage self correction. I have done several and have been very pleased with the results.

A participant died and had a valid loan outstanding at the time of his death. Surviving spouse wants to continue to make loan repayments on loan. Loan docs. and promissory note silent on issue. Is this permissible??

Section 1.417(e)-1(B)(2) says that consent is required for distributions under $5,000 after the annuity starting date. Does this mean what it says, or does it only apply to distributions that have already commenced.