Loan from S Corp to ESOP, misc. issues

[Guest tracys]

Let me preface this by saying that we try our best to steer clear of ESOP's... but this one sort of dropped in our lap. If there are problems here, I would just like a general idea of what they are and will likely use that information to convince them that an attorney is necessary.

An S-Corp established a non-leveraged ESOP at the end of 2001, the ESOP still owns less than 50% of the shares. From 2002 to date, the S Corp has extended loans totalling $16,000 to the ESOP cash account for purposes of paying participant distributions and paying the stock valuation fees. The accountant does not want to consider these as contributions to the plan - not sure why since their share allocations have not come close to the deductible limit.

1. Do these loans mean that the plan is now leveraged? If so, does there need to be a formal repayment schedule, etc. No payments have been made and it does not appear that any are planned in the foreseeable future. 2. Company by-laws restrict the ownership of stock to employees so all distributions were made in cash. It is my understanding that the ESOP cannot sell these shares back to the company because it owns less than 50% and the share reconciliation I received shows that the shares remain in the plan. Can they remain in the plan as "unallocated". If they must be allocated, but the money used to pay for them was a loan and not a contribution, what is the basis for the allocation? 3. Is it appropriate for the ESOP to pay for the stock valuation fees? 4. The ESOP received a distribution(dividend) of $2,300 in 2003 which was not reflected on the participants statements because the right hand was not talking to the left. Is there any other way to use the money.. like as a loan payment? The plan is of good size so this would not amount to much for anyone.

I would greatly appreciate any thoughts on my questions as well as any other areas of concern that I may be overlooking. Never again will I say "it's not leveraged... how complicated can it be?".