Distribution to Retiree in Leveraged ESOP

[nancy]

Can the ESOP borrow additional funds to purchase the stock of a retiring employee in order to raise the cash to make a distribution? Or do you need to go through the steps of distributing the stock, having the employer sell the stock to the ESOP through a leveraged transaction? This is a nonpubicly traded employer.

[BeckyMiller]

It seems like every ESOP answer includes the disclaimer - you need to get competent legal counsel. And gosh...I am not even an attorney and I am telling you this.

The DOL sees ESOPs as prohibited transactions waiting to happen. As such, ESOP fiduciaries need to be very conscientious about every action. Though ESOP fiduciaries may be exempt from the ERISA requirement of diversification, they are not exempted from the other rules, one of which is that the plan be managed with an eye to liquidity requirements.

The plan can distribution stock subject to the put, as you have noted. The trustee may be able to use existing cash, the trustee may be able to sell shares to provide liquidity, there is a limited purpose PTCE allowing a short-term interest free loan of cash to the plan, but folks argue about whether this can be used to cover distribution needs. I have seen one letter ruling that discussed an ESOP which advanced cash to fund distributions and treated the advance as if it was a stock purchase loan. But, that is one old (1980 or 1981??) letter ruling and I sure wouldn't advise anyone to take that position without getting sound legal advice. In other words, back to my opening comment.