ESOP Loan - Line of Credit?

[Dawn Hafner]

Is it possible to have an ESOP loan meet all requirements of the regulations and be a line of credit form of a loan? If so, what are the pitfalls to watch for? If not, please provide a cite that would make this impermissible.

Thanks!

[BeckyMiller]

What do you mean by a line of credit form? Do you want a lending relationship where the plan can draw down funds periodically to fund the purchase of shares that participants choose to put back to the ESOP and the trustees agree to honor the put?

[Dawn Hafner]

Yes, the Trustee has executed a note for a Revolving Line of Credit. They will draw on the note as necessary to purchase stock from the public and to fund distributions from the plan. Distribution options include lump sum and installments and the participants elect to receive either cash or securities. To date all participants have elected lump sum cash distributions. The Trustee intends to draw on the Revolving Line of Credit to fund these distributions.

Can the plan document for a C-Corp ESOP be written to give the participant a distribution option to choose between cash and stock. Assume the bylaws do not prohibit outsiders owning stock. In operation, can the C-Corp. ESOP distribute the participant's securities account balance without using the Put Option?

[RLL]

Hi Dawn ---

Is the line of credit is guaranteed by a party in interest or does it otherwise constitute an extension of credit to the ESOP from a party in interest? If not, it is not subject to the requirements of the ESOP loan regulations. If so, there are some problems with what you've described that I can address if you answer this question.

Under IRC section 409(h)(2), any ESOP may provide for a distributee to elect between cash or employer stock as the form of distribution.

[Guest Pat S.]

Dawn suggested that I respond with addtl details. We are assuming the loan is guaranteed by the employer -- they haven't provided us with a copy of the security agreement yet.

[RLL]

Dawn and Pat S. ---

Under Reg. section 54.4975-7(B)(13), an ESOP loan must be for a specific term. If a line of credit were used as an ESOP loan, each draw down of funds should be converted into a term loan.

Under Reg. section 54.4975-7(B)(4), the proceeds of an ESOP loan must be used to purchase employer stock or to repay a prior ESOP loan. The loan proceeds may not be used to make distributions of ESOP benefits in cash.

These are only some of the concerns raised by the proposed arrangement under the ESOP loan regulations. It is very difficult to address all of the pertinent issues in a message board forum such as this. Perhaps your client should be consulting with legal counsel who has more experience working with ESOP loans and benefit distributions.

[Guest Pat S.]

RLL,

Thanks. I agree, they should consult an ERISA atty regarding the loan.

[RLL]

Pat S. ---

There are many ERISA lawyers who do not have expertise in dealing with ESOPs. Your client should use a lawyer with extensive experience with ESOP loans.

[Guest Pat S.]

good point!!