Employer Stock

[Guest THess]

I have recently obtained a client who has $105,000 in (RO) assets, of which $70,000 of the RO was to Employer Stock. The client has a 401(k) Plan. I know there are limitations of how much can be invested in Employer Stock in a 401(k) Plan, however an attorney set up this plan and said that he could do this. Is there something I am missing? I do not normally deal with Employer Stock. And if this is allowed, does the stock have to be audited by an independent appraiser (how to report on 5500)?

Thank you so much for any help you can give me regarding this!

[Guest planman]

By "RO" are you referring to a rollover from a previous plan? There is not a limit on how much your client invests in employer stock unless your client's plan has set a limit on investing in the employer stock or other investment options. Your question about an appraisal makes me wonder if the stock is public or private. Isn't the trust reporting the value of the stock for you to include on your 5500?

[Guest THess]

The RO was unrelated. The $70,000 was the cost of the employer stock, and that was what was reported to me. I don't think that is the value, but maybe it is. That was what I was wondering...If that's what he paid for it, doesn't it have to be appraised?

Thank you so much planman!

[ljr]

Yes, and such appraisals tend to be pretty expensive. Since the stock is a rollover asset of one participant, a possible alternative is for that one participant to roll the stock out to an IRA trusteed by their local bank trust department? While it would still need to be appraised, there could be more flexibility in an IRA as opposed to a 401(k) plan. I've heard of IRA trustees being willing to do an appraisal of closely held stock "every few years' and not require an annual appraisal until the minimum required distribution rules come into play. Good luck!

[mbozek]

Wher is the employer stock held? In the employer's 401(k) plan? An IRA? The employer stock will only be eligible for favorable capital gains taxation if it is distributed from the plan sponored by the employer. Stock rolled over to an IRA will be taxed as ordinary income. Also the IRA custodian will not perform an appriasal of the employer stock- check the custodial agreement. Most custodians will not take non publicy traded investments unless the owner provides the custodian with a party who will value the stock as of the end of each calendar year. I am not aware of custodians who will ignore the annual valuation requirement for non publicly traded assets since the IRS could revoke the custodians authority to hold IRA accounts. If a valuation is not performed the custodian will close the account.

[E as in ERISA]

There is not a limit on how much your client invests in employer stock unless your client's plan has set a limit on investing in the employer stock or other investment options. Your question about an appraisal makes me wonder if the stock is public or private.

Actually, this rule is stated backwards. There is generally a 10 percent limit that applies to the plan as a whole (not any specific account). However, there is an exception that allows the plan to authorize a higher percentage -- up to 100 percent.