Amend From ESOP to 401(k)

[Guest CitationSquirrel]

Can you amend an ESOP (actually a KSOP) to remove the stock provisions and just leave a 401(k) plan?

Here are the facts, as I understand them. The sponsor has a non-leveraged ESOP with 401(k) provisions. It was one of those start-up financing deals. The early facts are a little fuzzy as it wasn't our plan at the time. But as I understand it, the 11 or 12 initial employees received the ESOP contribution. After the initial ESOP transaction, no further stock was contributed. So, the initial employees have employer stock in their accounts. The sponsor does not intend to make any additional stock contributions.

What I am wondering is can the plan be amended and restated to remove the ESOP provisions and make it a regular 401(k) plan? The current stock that is held by the initial employees in their accounts would simply be treated in the same manner as a frozen investment option.

Any thoughts?

[mbozek]

It seems that you have a stock bonus plan with a 401(k) option. I don't know why you need to change. The plan can continue as is without being terminated because it will receive continuing contributions. Freezing the plan does not change anything. If you remove the ESOP options what will happen to the employees right to diversify assets /put the stock to the plan?

[RLL]

Hi CitationSquirrel ---

Under the ESOP regulations, the plan may be amended to become a "non-ESOP," subject to maintaining certain non-terminable rights with respect to the shares of employer stock (if still in the 401(k) plan). These rights are outlined in the regulations and include the put option requirement if the shares are not readily tradable. In addition, the right to diversify and the applicable voting pass-through rights should continue to apply to the stock.

The non-ESOP 401(k) plan will not continue to allow for certain ESOP tax benefits, such as the deductibility of dividends undert IRC section 404(k).

[Guest Frank Berrodin]

What is the authority for having to continue to apply the pass through voting rights requirement after the plan is no longer an ESOP? The regulations appear to only require the put option rights to continue.

[mbozek]

I thought the 404© regs/ sec rules require that voting rights on er stock in 401(k) accounts be passed through to the participants.

[Guest lawdawg]

So does this mean the plan would need to establish a separate ESOP account for the existing shares? If the plan is restated into a 401(k) plan, could they not just permit participants to self-direct their accounts (assuming it is permitted) which could result in the ESOP participants selling the ESOP shares and investing in any other investment option permitted by the 401(k) plan?