KSOP Proxy Voting for Public Company

[Guest EMozley]

We have a plan that has been setup as a KSOP. The plan allows for contributions to be made in qualifying employer securities or cash. The plan is participant directed among employer stock and mutual funds and is intended for the Trust to hold more than 10% of plan assets in the form of qualifying employer securities.

The debate we are having is whether the KSOP plan must follow the rules of 409(e)(2) in regards to proxy voting. Do all defined contribution plans have to allow pass through voting because the company is publically traded, or only ESOPs?

Any insight would be helpful, thanks!

[RLL]

In the case of a "publicly-traded" company, the "pass-through" voting requirement under IRC section 409(e)(2) applies only when a plan is designated as an ESOP under section 4975(e)(7) or a tax-credit ESOP under section 409(a).

If the "KSOP" of a "publicly-traded" company is a non-ESOP stock bonus plan or profit sharing plan, section 409(e) does not apply....although it is quite common for such a KSOP to provide for a "pass-through" of voting rights to participants (even though it's not required).

[Guest EMozley]

When you say that the plan is designated as an ESOP under 4975(e)(7), do you mean the plan has to qualify as an ESOP? The plan document does not clearly designate that the plan will be an ESOP under 4975(e)(7), but it does indicate that it intends to invest more than 10% of plan assets in qualifying employer securities, which it has. So my problem is determining whether the plan qualifies as an ESOP under 4975(e)(7) because the document does not state that it is. As far as I can tell the plan is a stock bonus plan, due to the fact that a participant can take a distribution in employer securities or cash.

I am trying to make the determination of whether the plan is a non-ESOP stock bonus plan were section 409(e)(2) would not apply, but so far it appears to be an ESOP stock bonus plan. I say this because of the amount of plan assets in employer securities (more than 10%) and the distribution procedures qualify under sections 409(h) and 409(o).

Is there something else that one should look for in determining whether the plan is an ESOP stock bonus plan or a non-ESOP stock bonus plan?

Thanks for your comments!

[RLL]

Reg Section 54.4975-11(a)(2) provides that "To be an ESOP, a plan must be formally designated as such in the plan document."

It is very common for a non-ESOP stock bonus plan or profit sharing plan to invest more than 10% of its assets in company stock, pursuant to ERISA section 407(B).

[IRC401]

1. Has the company been filing 5500s for an ESOP?

2. What does the determination letter say?

Over the past several years, a number of publicly traded companies that pay dividends have been converting their 401(k) plans (or parts of them) to ESOPs in order to deduct dividends. If the company pays a dividend, is it possible that the plan was converted to an ESOP and that you don't have all of the amendments?

[Guest EMozley]

The plan document states that the plan will be a KSOP.

In response to IRC401, the employer has been filing the plan 5500 as an ESOP. The plan is currently in the process of obtaining a qualification letter, so I can't look there, at least not yet. As for whether the employer has been deducting the dividends that it has paid, I am not sure. It sounds like it is time to ask.

Thanks for the input, very helpful - ESOPs can be fun!

[Guest EMozley]

To make a complicated issue easy, I took IRC401's advice and checked the Application for Determination and the plan is classified as a profit sharing 401(k) plan, not an ESOP.

However, I would like your opinion on another matter relative to this particular plan. I checked the site given by RLL, ERISA section 407(B) which allows more than 10% to be invested in employer securities. Under ERISA section 407(B)(2)(A) and 407(B)(2)(B), it states that the portion of the plan applicable to elective deferrals is not an eligible individual account plan if any portion of the elective deferrals are required to be invested in qualifying employer securities. My situation is that this plan has a match formula that gives a considerable higher rate of match to those participants who choose to invest in employer securities as opposed to investing in mutual funds.

The choice is the participants to direct investment of deferrals, but it seems that because of the match formula it could be perceived to be forcing the participant to invest in employer stock.

Any thoughts?

[RLL]

The plan is not an ESOP under IRC section 4975(e)(7), as it has not been formally designated as such in the plan document. The designation of the plan as a "KSOP" has no legal significance, as "KSOP" is not a term recognized under the IRC or ERISA. The 5500 has been completed erroneously if it designates the plan as an "ESOP."

Dividends on company stock are not deductible under IRC section 404(k). The plan is not subject to the voting rights requirement of IRC section 409(e)(2).

Inasmuch as participants have investment discretion over their elective contributions, the plan is an "eligible individual account plan" under ERISA section 407(B) if it expressly provides for investments in company stock beyond the 10% limit. The additional match available for participants who direct investments into company stock may be a testing issue under IRC section 401(m), but it's not a problem under ERISA section 407(B).

Enough?

[Guest EMozley]

Enough? You bet, thanks for the replies.