Form of contribution to safe harbor 401(k)

[Medusa]

This has been asked before by others, but with no responses, so I'll take another shot at it:

Can a safe harbor match or nonelective contribution be made in employer stock instead of cash? I could find nothing precluding it.

Any guidance appreciated. Thanks,

Medusa

[Guest James Osterhaus]

A contribution that is required to be made cannot be made in a form other than cash. If you were talking about a discretionary contribution the answer would be different. Employer stock cannot be used to satisfy any funding obligation that is measured in dollars.

The U.S. Supreme Court has ruled that the contribution of unencumbered property by an employer to satisfy its minimum funding obligation to a defined benefit plan is a prohibited transaction subject to excise taxes (Commissioner v. Keystone Consolidated Industries, Inc., US Sup Ct (1993), 113 S. Ct. 2006). The Pension Welfare Benefits Administration has further ruled that a noncash, in-kind contribution to a defined contribution plan or a welfare benefit arrangement would also constitute a prohibited transaction if it is used to satisfy a funding obligation that is measured in cash (PWBA Interpretive Bulletin 94-3).

[Guest Tom Geer]

Yes, it would create a prohibited transaction, but that's not the end of the issue. What creates problems is a nonexempt prohibited transaction, and Code 4975(d)(13) and ERISA 407 and 408(e) provide that acquisitions of qualifying employer securities are exempt. And, 414(k) doesn't say that the safe horbor contributions has to be treated as a deferral, it only requires immediate vesting and application of 401(k) distribution restirctions. Last, the limitations on investment of elective deferrals in employer securities in ERISA 407(B)(2) apply only to deferrals. I don't see any prohibition, but I would be very careful to get a good appraisal (even where one is not technically required, as they are for ESOPs) to avoid pricing disputes that could lose the exemption and/or lose the safe harbor.

[Medusa]

James and Tom: Thank you for your very thorough responses. We will probably advise the client to err on the side of caution in this case.

M.

[Medusa]

For those who are interested, the following e-mail message was sent by the individual working on getting our volume submitter plan approved:

The question was raised whether safe harbor matching contributions could be made in Employer stock.  The concern was that DOL Interpretive Bulletin relating to in-kind contributions to employee benefit plans [section 2509.94-3©] prohibited it.  It states, "In the context of defined contribution pension plans and welfare plans, it is the view of the Department that an in-kind contribution to a plan that reduces an obligation of a plan sponsor or employer to make a contribution measured in terms of cash amounts would constitute a prohibited transaction under section 406(a)(1)(A) of ERISA (and section 4975©(1)(A)of the Code) unless a statutory or administrative exemption under section 408 of ERISA (or section 4975 ©(2)or (d) of the Code) applies."

The volume submitter coordinator called Dick Wickersham in D. C. to look into the question.  Wickersham's assistant maintains that Section 408(e) of ERISA provides the administrative exemption that makes this permissible.  This section deals with the acquisition or sale by plan of qualifying employer securities; acquisition, sale, or lease by plan of qualifying employer real property.  The exemption is available if the acquisition is valued at fair market value; if no commission is charged; and if the plan is a profit sharing, stock bonus, thrift, savings plan, esop, or a money purchase plan which was in existence on the date ERISA was enacted and which invested primarily in qualifying employer securities.  This is what prevents a defined benefit plan or post ERISA money purchase pension plan from being funded with employer stock.  The corresponding Code section is 4975(d)(13).

Therefore, the volume submitter coordinator will permit this in a 401(k) plan if we indicate that the acquisition of employer securities satisfies ERISA Section 408(e).