Stock options in 401(k) plan with employer stock

[Guest Judy S]

I have a 401(k) plan that includes employer stock. The stock is listed on the pink sheets and is thinly traded. Terminated employees receive cash for their employer stock. Employer is a C-corp.

The company officers have had stock options since 1999 that they must exercise by the end of this year. They would like to exercise them within the plan by using cash in their plan accounts to buy the stock, and then hold the stock in their accounts.

Is this a problem? Sure seems like it to me, but I'd like some outside opinions.

[E as in ERISA]

I assume that what they are trying to do is buy stock in the plan at the exercise price of the option (which I assume is lower than fmv)? I agree that sounds like a problem.

[Guest Judy S]

No. They are willing to pay the FMV for the stock. No shenanigans there.

[E as in ERISA]

Then what do they need the options for? To be entitled to purchase the stock? If only the ones with options can purchase stock in the plan, then I would definitely say you have a problem!

[Guest Judy S]

I guess I wasn't very clear in my reply-the officers will be paying the option price which is presumably below the FMV or this wouldn't be an issue. I have to agree with you that they have a problem. This transaction should take place outside the plan.

[jaemmons]

The transaction should definitely take place outside of the plan. Generally, the options become a personal asset when exercised. To use qualified retirement assets to purchase "personal" assets would violate the prohibited transaction rules. The prohibited transaction rules clearly stipulate that a transaction cannot take place directly or indirectly between the plan and a party in interest. The plan would be purchasing personal holdings from the officers and other employees and qualified retirement plans are generally prohibited from doing this.