Timing of distribution under 409(o)(1)(B) to retired employee

[Guest alliketchum]

An employee retired in 2002 (at the normal age under the plan). Her entire account balance consists of stock purchased with an ESOP securities acquisition loan; therefore, no distribution has yet been made to the employee. The loan will be paid in full at the end of 2004. What is the timing of the distribution that must be made to the employee under 409(o)(1)(B)? Does the employer have to make the first payment on the last day of the plan year in which the loan will be fully repaid, or does the employer have a reasonable time in which to begin distribution?

[RLL]

Hi alliketchum ---

What does the ESOP plan document provide?

Note that IRC section 409(o)(1)(B) does not supersede the requirements of IRC section 401(a)(9) and (14), which may require that benefit distributions begin prior to the full repayment of the ESOP loan. Also note that ERISA section 206(a) includes a benefit distribution requirement that is similar to IRC section 401(a)(14).

[Guest alliketchum]

For purposes of my question, let's assume that 401(a)(9) and (14) do not require an earlier distribution and that the ESOP documents provide language similar to that in 409(o)(1)(B).

[Guest tcroscut]

RLL,

You have posted on a number of occasions that 409(o)(1)(B) does not supercede the requirements of IRC section 401(a)(9) and (14). Could you share with me your support for this statement? I researched this issue briefly and I did not find anything that led to your conclusion. Thanks for your assistance.

[RLL]

tcroscut ---

An ESOP is required under IRC section 4975(e)(7) to satisfy the requirements of section 401(a), as well as the provisions of section 409(o). Nothing in section 409(o) or elsewhere exempts an ESOP from the requirements of section 401(a)(9) and (14), and compliance with section 401(a)(9) and (14) is not inconsistent with also satisfying section 409(o).

Even if an ESOP satisfies the requirements of IRC section 409(o) with respect to benefit distributions, failure of the ESOP to also satisfy the requirements of section 401(a)(9) and (14) would result in the ESOP's failure to be qualified under section 401(a).

Finally, with respect to IRC section 401(a)(14), its provisions relating to the payment of benefit distributions are essentially the same as those required for "pension plans" (including an ESOP) under ERISA section 206(a).

[Kirk Maldonado]

RLL's position was also contained in the legislative history to the Tax Reform Act of 1986.

[Guest tcroscut]

Thank you for clearing that up!