408(e): cash and a note?

[Guest Hadden2001]

A stock bonus plan wants to sell some of the employer stock that it holds to the plan sponsor in exchange for cash and a note. Assume that the cash and note are FMV for the stock. Is the note a separate prohibited transaction? Or, is it fine that part of the value provided in a 408(e) transaction is a note?

[mbozek]

I dont know whether this would be a PT but I would not want to be the fiduciary who agrees to take a note instead of cash for plan assets. Is this consistant with the exclusive benefit rule? If the Employer cant pay for the shares now why will the er be able to pay in the future? And what if it doesn't have the cash? At the least the plan should get collateral for the note. Further what is the ER going to to do with the stock certificates? Are these shares to be returned to the treasury or issued to other shareholders in return for compensation?

[jpod]

I believe it is a separate pt. 408(e) merely exempts any pt that would arise as a consequence of the purchase or sale of qualifying employer securities; the note represents a prohibited loan.

[Kirk Maldonado]

I agree with JPod.

[RLL]

Hadden2001 ---

There is no question about it....the employer's note is a prohibited extension of credit from the plan to the employer under ERISA section 406(a) and IRC section 4975. The exemption under ERISA section 408(e) covers the sale/purchase of the stock, but not the extension of credit.

[Guest Hadden2001]

I agree with all of you that it is PT. Thanks for the input. I was just wondering if anyone thought an argument could be made since I was unable to find anything when focusing specifically on 408(e) the forbide the acceptance of a note.