ESPP - is it technically "funded"?

[Guest kmbrown]

I am reviewing a ESPP document that was prepared by another professional a few years ago and I have found one item that I am hoping somebody could help me with. The drafter included a provision stating that "the contributions of the participants shall remain the property of the participants at all times as long as they remain segregated according to participant, though the company may use any unsegregated contributions as it sees fit." Though it generally makes sense to me that an ESPP is a funded plan, I am seeing nothing in the statutes or regs or in my reading to confirm this and none of the other plan documents I have read have included similar language or provisions. Has anybody else seen similar language or are you familiar with a cite to support it?

Thanks in advance,

Kristen

Raleigh, NC

[Kirk Maldonado]

Kristen:

I worked on many ESPPs and never seen language like that. Nor can I understand why anybody would draft language like that.

Also, ESPPs should not funded. But, because they aren't subject to ERISA, the issue of "funded v. unfunded" isn't of major importance.

[Guest kmbrown]

From my lurking, I knew you were knowledgeable in ESPPs, so I am happy to hear from you. If I can ask a couple follow-up questions - I am guessing that they were trying to give some comfort to the participants about the security of their controbutions, but if the Company were to fall apart during the offering period (i.e., before any stock is purchased), would the payroll deduction amounts be subject to creditors' claims? I would think that this would be a matter of law, regardless of the provision's statement that "Contributions .... shall remain the property of the relevant participants ... and shall not be subject to the claims of the Compnay's creditors." Knowing that you haven't seen this in a plan document before, would it be out of line to suggest removing it?

Thanks,

Kristen

[Kirk Maldonado]

Kristen:

Every ESPP that I've seen provides that the participant contributions become the assets of the corporation, and that the corporation is free to use those assets in whatever means it desires.

That means, if the company goes bankrupt (before the stock is purchased), then participants lose all of their contributions.

I recommend you revise the plan to use similar language.