First year of ESOP, stock issued but no eligible employees. ?

[Guest FutureOne]

An ESOP was established August 1, 2002. 3 millions shares of stock were also issued in 2002. The problem is no one is eligible until the 2003 plan year. What is done with the stock, and how is this reported on the Form 5500?

[RLL]

Hi FutureOne ---

For an ESOP to be "qualified" under IRC sections 401(a) and 4975(e)(7), there must be employees who are eligible to participate. It appears that this ESOP was not a "qualified" plan in 2002.

What type of transaction resulted in the issuance of the shares to the ESOP? Who sold the shares to the ESOP? Is there an ESOP loan?

[Guest FutureOne]

Thanks for your help. The determination letter was requested in March of 2003 by the firm who also drafted the document. My thought was that a provision was not included in the document that said employees who were employed on a certain date were automatically eligible to enter the plan.

It is partial cash and note payable to the trustee who owned the shares and sold them to the ESOP in August of 2002.

[RLL]

FutureOne ---

If the ESOP was not "qualified" in 2002, the financing of the ESOP's stock purchase through the purchase money note may be a prohibited transaction under ERISA. In addition, if the ESOP received a cash contribution in August 2002 (which it used for partial payment for the stock), the contribution is nondeductible if there were no ESOP participants that year.

I recommend that you seek the advice of legal counsel experienced in ERISA and ESOP matters in order to resolve these issues.