ESOP Loan is paid off, can they make a profit sharing contribution?

[Jilliandiz]

30% of the stock was sold, and the ESOP loan has been paid back for 2 years now, therefore no loan balance remains. However, the company has experienced profit this year and wanted to know if they could make a contribution to the ESOP plan? Is that possible? Can the ESOP accept profit sharing contributions?

[QDROphile]

The plan document controls, and you may wish to amend it to allow the contribution if the document does not provide for it. The fact that the employer has profits does not make a cash contribution a profit sharing contribution. The ESOP may be a profit sharing plan, a stock bonus plan or a stock bonus and money purchase pension plan. The nature of the plan and plan terms will determine if the cash gets caught up in the ESOP rules (subject to the requirement that distributions be in shares, for example). The employer may want to have a new plan rather than get the cash trapped in an ESOP, or it may be a very good thing to start building cash in the ESOP. The employer needs good advice in addressing the big picture before making the wrong decision about what to do with today's cash.

[Kirk Maldonado]

QDROphile:

Couldn't you achieve the same result by adding a separate profit sharing plan feature to the ESOP?

[QDROphile]

Sure, either as a separate plan (for tax purposes), or to make the ESOP "form a portion of a plan, the balance of which [is a qualified profit-sharing plan]" in the curious words of the regulation. That is why I noted the the ESOP could already be a profit sharing plan. What happens to the cash relative to the requirements applicable to the ESOP feature is determined by the terms of the plan.