Company Stock as Plan Investment

[Dougsbpc]

We administer a 90 participant 401(k) Profit Sharing Plan where salary deferrals are self-directed but profit sharing money is pooled.

The company that sponsors the plan is privately held mostly by employees of the company (though not through an ESOP). Next year, two long-time principals will be retiring and selling their stock. It appears the plan qualifies as an eligible individual account plan and can therefore have more than 10% of assets invested in company stock (actually, in their case it would be about 12%). Question: Is it possible for the plan to simply write a check to these individuals in exchange for their stock?

Suppose a few years from now the plan wishes to sell the stock. Can it sell the stock to the company?

Thanks

[IRC401]

The trustees may invest the profit-sharing money in the privately held stock. Keep in mind that the decision to purchase the stock is a fiduciary decision subject to all of the fiduciary prudence standards. Lack of liquidity is one factor that should affect the decision. [The fact that in a post-Enron world juries may not be sympathetic if the stock tanks is another factor that I would think about.]

The trustees should also think about administrative issues, such how they will value the stock and how they will cash out departing employees. If the company is using a third party administrator, they should discuss the operational issues with them. The DoL will probably expect the plan to get an appraisal of the stock each year.

If anyone wants to invest 401(k) money, talk to a securities lawyer.

[Dougsbpc]

Thanks much for the answer IRC401.

This plan would have the stock in their pooled profit sharing account only. The stock would only represent about 12% of total pooled assets so cashing out participants would not be a problem.

The one thing I am not sure of is whether the trust can directly purchase stock from retired employees. For example, one retiring executive has $200,000 worth of company stock. If the plan were to purchase his stock (after a proper appraisal of course), could the plan simply write the retiree a check for the value of the stock?

Thanks again.