Yesrod5

ESOP Guy, Thank you for your thoughts.

ESOP has a rebalancing provision that requires year-end reallocation so that each participant's account is made up of the same ratio of company stock to other investments. For the first time, there is an ESOP participant who wishes to sell company stock he/she owns outside the ESOP. The ESOP Trustees believe it would be in the best interest of participants and beneficiaries for the ESOP to purchase the stock. IRC Section 409(n) provides in part that: "no portion of the assets of the plan . . . attributable to (or allocable in lieu of) employer securities acquired by the plan . . . in a sale to which section 1042 applies may accrue (or be allocated directly or indirectly . . . ) . . . for the benefit of . . . any taxpayer who makes an election under section 1042(a) with respect to employer securities." Assume that the ESOP's acquisition of the stock is completed in May of 2020. When the "regular" calendar year 2020 allocation is done (in the spring of 2021), certainly the selling shareholder cannot receive an allocation of any portion of the stock the ESOP acquired from him/her. So, such participant receives a smaller allocation than that received by a similarly situated participant who had not sold company stock to the ESOP in a sale to which section 1042 applied. Immediately after completing the "regular" allocation for 2020, the rebalancing provision is addressed. May the selling shareholder's account receive the allocation of additional company stock needed to bring his/her account into balance (ratio of company stock to other investments) assuming the reallocation calculations would so require? Inasmuch as the rebalancing would likely affect virtually all participants in one way or another, it would seem that the prorata portion of the stock initially acquired by the ESOP in the 1042 transaction that might find its way to the selling shareholder's account would be minimal. Is the answer any different for the rebalancing that would be completed for 2021 (in the spring of 2022) - assuming no additional 1042 transactions?

I have received the following question from a fairly sophisticated client who is a fiduciary as to his company's 401(k) plan: "I question whether this role [as a fiduciary] has implications for us as is customary for fiduciaries, such as limiting our ability to invest personally (outside of the 401(k)) in the funds offered in the 401(k)." Personally, I see no problem -- for the following reasons: (A) The relevant prohibited transaction provision of ERISA Section 406(b)(1) prohibits a fiduciary from: "deal[ing] with the assets of the plan in his own interest or for his own account." To me, the stated concern the client expressed is not snared by this prohibited transaction provision (and no other prohibited transaction provision appears to apply); and (B) the exclusive benefit rule of ERISA Section 404(a)(1) does not appear to prohibit the contemplated action. In short, i see no problem with a fiduciary using for his individual investment purposes knowledge gleaned from his experience as a plan fiduciary. Any thoughts?

Belgarath, After poring through Section 103 and Reg. Section 2520.103-6, and finding many definitions (including a definition of "reportable transaction") but no definition of "transaction," I came to the same conclusion you did (my situation involves a merger of plan assets) that this was a mere re-titling of assets, not a sale, exchange or other "transaction" to which the "reportable transaction" requirements would apply.

Marcus, Thank you. We are planning an extension of the loan and the company's write down of a portion of the loan. We are also contracting with an independent trustee - - to look out for the interests of the participants, among other duties.

ESOP Guy, Thank you for this wealth of information.

We are trying to clean up a situation involving an S corporation that was hit hard by the recession. The S corporation has been 100% ESOP-owned since 2004. Due to the reduction in payroll resulting from the recession, contributions to the ESOP to enable it to meet its debt service back to the S corporation have for several years been roughly double the 415 limitation. We have considered treating the excess contributions as S corporation distributions, but the stock value has dropped so much that it's virtually impossible to allocate enough stock (at its fmv) to participant accounts to meet the dividend-make-whole requirements of IRC Section 4975(f)(7). We are likely to recommend that the loan be refinanced. We would also like to increase the amount of the loan but feel that this can be done only if additional shares are purchased by the ESOP. Although it seems counter-intuitive, I believe I have read or heard somewhere that an ESOP that already owns 100% of an S corporation can still buy more shares (and borrow the purchase price from the company). Any thoughts would be greatly appreciated.

RLL, Thank you. So essentially we bifurcate the transaction so that on one hand we have an exempt transfer of stock by the party in interest to the plan in return for "payment" while on the other hand we have a non-exempt transfer of real estate to a party in interest in return for some form of payment?

Are we all in agreement that it is a prohibited transaction for a disqualified person to purchase, for cash, real estate held by the company's profit sharing plan (the real estate is not qualifying employer real property)? Seems clear that ERISA's basic prohibited transaction provisions control here (i.e., Section 406(a)(1)(A)). Is the result any different if the disqualified person, instead of paying cash, exchanges his company stock for the real estate (assuming meticulous valuations of both the company stock and the real estate and assuming no commission is charged)? Or does the exemption under ERISA Section 408(e) trump the underlying prohibited transaction. The exemption under Section 408(e) provides that Section 406 does not apply where the plan's acquisition is for adequate consideration and no commission is charged. If the exemption (Section 408(e)) trumps the underlying prohibited transaction (Section 406(a)), what is the policy that would allow a disqualified person to buy, for stock, something that he/she could not buy for cash?

I am struggling with the look-back question now. I note that the definition of "disqualified person" under the private foundation rules specifically includes a 5-year look-back period for "any person who was . . . in a position to exercise substantial influence over the affairs or the organization." IRC Section 4958(f)(1). Thus it seems reasonable to me to conclude that the absence of any look-back provision in the definition of "disqualified person" under 4975(e)(2) means that there is none. Yet prudence might dictate some delay between the time of escape from disqualified person classification to the date of the transaction to minimize any possible claim of some inappropriate lingering influence. I would be interested in anyone else's thoughts on this question.

One correction - - meant to say "401(a)(11) and 417"

And am I correct in believing that an existing nonqualified plan that included a provision requiring spousal consent to the naming of a beneficiary other than the spouse could be amended to delete that requirement? It would seem to me that just as 411(a)(11) and 417 are not applicable to nonqualified plans neither is 411(d)(6). Am I on track here?

QDROphile, Thank you for your most prompt and helpful response.

Client has an individially designed plan (happens to be an ESOP) that was prepared by Sungard/Corbel in response to a checklist we submitted. The plan provides that in order to receive an allocation for a given year, a participant must be "actively employed on the last day of the year." I can't imagine that someone who is away from work and on long-term disability could be "actively" employed on the last day of the year. Am I missing something here?

Reg. Section 1.409A-3(b) says generally that a plan provides for payment upon a permissible event (e.g., retirement, death, disability, separation from service, etc.) "if the plan provides the date of the event is the payment date, or specifies another payment date that is objectively determinable and nondiscretionary at the time the event occurs." [emphasis added] The regulation also provides that "a plan may also provide that a payment . . . is to be made during a designated period objectively determinable and nondiscretionary at the time the payment event occurs, but only if the designated period both begins and ends within one taxable year of the service provider or the designated period in not more than 90 days and the service provider does not have a right to designate the taxable year of payment . . . ." [emphasis added] Must this be read so literally as to require that the plan cannot say, for example, that "the service recipient may, in its discretion and without input from the service provider, make payment either: (i) within the taxable year following the year of the event, or (ii) within 90 days of the event."? In other words, if the service recipient wishes to take advantage of the flexibility afforded by permitted delay in payment, must the plan specifiy either (i) or (ii) - but not both (because permitting both would insert some discretion into the mix)? Thanks.