ESOP Distributions

[Guest jmlumpkin]

ESOP Plan Document states that distributions made to participants with account balances in excess of $5,000 will be paid over a period of time not to exceed 5 years. Also, distributions can only be made in cash. However, the Plan currently does not hold cash. Therefore, in order to make distributions, Employer must contribute enough cash each year in order to facilitate cash distributions.

Q1: Employer is S-corp. Can we restrict distributions to cash only? I thought participants must be given the option to receive stock distribution?

Q2: If participants with an account balance in excess of $5,000 are to be paid over 5 years, and distributions cannot be made in stock, does he or she retain a balance in the ESOP despite having elected a distribution (Employer effectively makes a cash contribution each year for five years until account balance has been distributed)? If so, is the participant's remaining stock account subject to gain/loss while it is being distributed?

[RLL]

Hi jmlumpkin ---

A1: IRC section 409(h)(2)(B) allows an S corporation ESOP to distribute cash without offering distributees the right to demand distributions in shares of employer stock.

A2: If benefits are distributed over a five-year period, as permitted by IRC section 409(o)(1)©(i), the undistributed portion of participants' account balances remain invested under the ESOP trust either in shares of employer stock or in other investments, as provided in the ESOP plan documents. To the extent that account balances remain invested in employer stock, subsequent distributions will be based on updated share values.