ESOP Distribution Options

[Guest CRC02]

A colleague and I are are engaged in a debate regarding what distribution options must be available in an ESOP. Specifically, we are arguing whether an ESOP can provide for distributions in the form of a lump sum ONLY. I maintain that a lump sum can be AN option, but as 409(o)(1)© says you must offer an annuity unless the participant elects otherwise, that an annuity has to be the default form of distribution. He argues that as a lump sum is distributed more rapidly than an annuity, a plan can provide for lump sum distributions only.

Any thoughts?

[RLL]

Hi CRC02 ---

Your colleague is correct. IRC section 409(o)(1)© merely limits an installment distribution to a five-year period.....it does not require an "annuity" and does not prevent an ESOP from providing that a lump sum is the only available distribution option.

[Guest CRC02]

Thanks for your response--even if I am wrong. Is that rule set out somewhere--PLR or anywhere else?

[RLL]

CRC02 ---

Read the committee reports under the Tax Reform Act of 1986, which added subsection (o) to IRC section 409. I'm not aware of any IRS guidance on this issue....but you might want to check the ESOP Examination Guidelines.