Can a sponsor of an ESOP hold contributions as cash?

[Guest jhilliard]

I was having a discussion with a prospect that has a qualified 401(k) plan as well as an ESOP. While speaking with this gentleman, he disclosed that the ESOP holds mostly cash; he has not been utilizing the cash to obtain employer securities.

I am not very familiar with ESOPs but this seemed to be out of line with how an ESOP is to function. I thought the sponsor was under timing restraints to invest the cash contributions in ER securities? Am I missing the boat on this?

Can anyone tell me if this is a problem? Is more data needed to evaluate?

Thanks in advance for your help.

[TCWalker]

You're correct, IRC 4975(e)(7) requires that an ESOPs be designed to invest primarily in employer stock. However, it does not subject the plan to an every day standard to be so invested, generally, it's judged over the lifetime of the plan, - a long term risk. Failing to invest primarily in employer securities for any material time period may subject the plan fiduciary to liability for losses incurred because the plan was not investing primarily in employer stock - a more short-term risk. I guess the question is whether this fiduciary knows what he/she is doing, why and for how long?