Term note to pay benefits

[Guest SPOT]

Facts:

At plan year end the only asset of an ESOP plan is the employer stock. During the plan year, the ER loaned the plan $ to pay plan benefits. I am showing net assets of the plan as the market value of the employer stock reduced by the loan.

I'm not sure how to show this in my recordkeeping system. I'm thinking that I need to show negative cash in the participant accounts in my recordkeeping system.

Am I on the right track?

[QDROphile]

Start thinking about how you are going to deal with a prohibited transaction. Under Treas Reg section 54.4975-7(b)(4) an exempt loan can be used only for limited purposes and payment of benefits is not one of them.

[Guest SPOT]

The plan document allows the employer to loan the plan $ to pay plan benefits. This is intended to to comply with the provisions of the DOL PTCE 80-26. I am not questioning whether the loan is allowed. I'm just unsure as to how to reflect it in the participant accounts.

[BeckyMiller]

If it doesn't drive your system batty, this is effectively a negative cash account. If the shares that were in the former participant accounts have been allocated to the active participants, this negative cash account would be allocated to those participants in the same manner.

Hope that helps.

[RLL]

SPOT ---

The IRS has issued determination letters to numerous ESOPs which include provisions treating such PTE 80-26 loans in the same manner as ESOP stock acquisition loans [under IRC section 4975(d)(3)] for purposes of allocations of stock to participants' accounts.