Bonds Contributed to ESOP?

[Christine Roberts]

Is it ever possible to contribute to an ESOP bonds backed by debt instruments held by the employer sponsoring the ESOP?

My admittedly limited understanding is that the definition of qualifying employer securities under ERISA is broader than that under the Code and that the ERISA definition includes debt instruments.

[RLL]

Hi Christine ---

Certain "marketable obligations" described in ERISA section 407(e) are included as "qualifying employer securities" under ERISA section 407(d)(5) and may be held by an ESOP.....but may be contributed by the employer to the ESOP only under the very limited circumstances described in section 407(e)(1)©.

Note, however, that the ESOP still must be invested primarily in stock which constitutes "employer securities" described in IRC section 409(l).

[Christine Roberts]

Thank you. Can you recommend a good source of information on how to deal with the bonds upon maturity date, in a way that does not raise prohibited transaction concerns?

[RLL]

Christine ---

ERISA is THE source. If any "marketable obligations" held by the ESOP under ERISA section 407(e) are redeemed by the employer (assuming that the employer is the issuer) upon maturity, the exemption in ERISA section 408(e) should be applicable. Also, use of an independent ESOP fiduciary in connection with these transactions is advisable.