Leveraged ESOP 2nd Loan

[Guest JBeck]

Employer has a leveraged ESOP and allocates shares held in the suspense account as the loan is repaid. Employer has a chance to buy employer stock at an arms length transaction, and wants to loan money to the ESOP and have the ESOP buy the stock. So now we would have two loans and two allocations every year. However, the employer wants to keep the amount of shares allocated to participants at the same rate as before the second loan. Can this be done? If the employer were in financial difficulty, there are some PLRs that permit the employer to use the second loan to pay off the first loan as it come due, but not count such repayments for the purpose of determining the amounts to be allocated. But in this case, the employer is not in financial difficulty. Can this same approach be used?

[RLL]

If the provisions of the first loan permit modification of the repayment terms, it might be possible to reduce payments on the first loan in an amount sufficient to allow for minimal payments on the second loan with the total annual share release (and allocation) being the same as currently under the first loan. But the ESOP fiduciary would have to justify that this course of action is "primarily for the benefit" of the ESOP participants.

If the employer wants to keep the annual allocations at the same rate, why bother to have the ESOP buy additional stock at this time? Why not just have the employer purchase the shares? The shares can always be transferred to the ESOP at a later date.

The proposal for the second ESOP loan seems to complicate matters and raise potentially serious ERISA fiduciary issues. What's the point? What is the employer trying to accomplish here?

[Guest KB]

Can you delay the last loan repayment for the year (only if allowed grace period in loan documentation) such that shares would be allocated in the next plan year when the loan repayment is actually made? We maintained a leveraged ESOP with 2 loans at once and took this approach one year to "restrict" the number of shares being allocated so that we didn't allocated a windfall to participants.

[RLL]

KB ---

If the ESOP has received cash contributions (or, perhaps, dividends) made to enable the ESOP to make a loan payment, how does the ESOP fiduciary justify delaying that loan payment and the resulting share allocation to participants? How could such an action be in the best interest (and for the primary benefit) of the participants, as required by ERISA?

On the other hand, if the employer is not obligated to make contributions needed for ESOP loan payments and the employer elects to defer such contributions for a year (and defer the year of the tax deduction), then the loan payment and resulting share allocation may be delayed until a subsequent plan year.

[Guest JBeck]

What are the consequences if the employer defaults on the first loan?

[RLL]

JBeck ---

Is it the employer or the ESOP that would be defaulting on the first loan?

The consequences of a default would depend on the applicable provisions of the loan documents, the remedies available to the lender(s) and the course of action which the lender(s) chooses to follow.