Merged ESOP and 401(k) Plan

[Guest 91smithie]

In order to put unallocated shares back into the company's hands, a merged ESOP and 401(k) is going to do the following: First, the 401(k) matching contribution will be in stock from the unallocated shares but through a roundabout method. First, participants will be matched in cash in pay period but will not be allowed to invest this money until the end of a particular quarter at which point the cash would be used to purchase some of the unallocated shares and then will be immediately redeemed by the employer. Is this a prohibited transaction because it does not fall specifically within the limitation for a purchase of stock between the plan and the employer? What about the immediate redemption? Has anyone seen this before?

[RLL]

Hi 91smithie ---

Why would an ESOP fiduciary agree to this arrangement?

Is the fiduciary independent of the company?

The redemption of ESOP shares by the company can qualify for the prohibited transaction exemption of ERISA section 408(e) if the "adequate consideration" standard of ERISA section 3(18) is satisfied....but there is still the issue of compliance with the fiduciary duties of ERISA section 404(a)(1).