Retirement Distribution

[Guest dokc]

A leveraged ESOP was established 1-1-1999. The only assets are non-publicly traded stock. An employee age 67 and at normal retirement age (later of 65 or 5 years of participation) with a $100,000 account value wants a distribution from the plan. He is looking for "installment" type payments to provide a retirement income.

Plan provides for lump-sum distribution in cash, stock, or both. Plan has "put" option feature.

Can he request distribution of shares and put the shares back to the plan and receive annual payments for 5 years?

If the stock is "put" to the plan, does his account in the plan go to $0 and 0 shares? How is his interest in the plan reflected on the plan's books?

Is the plan required to provide "adequate security" and if yes, what is acceptable?

[RLL]

Hi dokc ---

Do the ESOP plan documents allow the ESOP to buy the shares subject to an exercised put option? Do the documents permit an installment payment for the shares that are put? If so, the ESOP trustee may be permitted or directed to repurchase the shares (subject to ERISA fiduciary rules).

If the ESOP distributes all the shares allocated to the participant's account, his account balance becomes zero and he ceases to be an ESOP participant. If the ESOP then repurchases the distributed/put shares in exchange for a cash down payment and a note, the distributee becomes a creditor of the ESOP (the ESOP records a liability for the note payable).

The ESOP's note must bear a reasonable rate of interest, should be guaranteed by the employer (ESOP sponsor), and must be secured by a perfected lien on assets of the employer or through guarantee of another party, such as a letter of credit or surety bond paid for by the employer. The general credit of the employer or a pledge of employer stock does not constitute "adequate security" under IRC section 409(h)(5)(B).

[Kirk Maldonado]

Remember that in addition to determining whether the (re)purchase of the shares is authorized by the plan document (as quite correctly pointed out by RLL), the fiduciaries need to determine that the repurchase is consistent with the fiduciary responsibility principles of ERISA.

[mbozek]

The participant should consult a tax advisor to determine whether a lump sum distribution of the stock can be taxed as capital gains for the portion of the distribution that is net unrealized appreciation with a tax rate of either 5 or 15% as the stock is sold. This could be more advantageous than electing installment payments which will be taxed as ordinary income which starts at 10%.