Salary deferrals in a Leveraged KSOP

[Guest dwerntz]

We are administering a KSOP for a closely held company. The employer profit sharing and matching is made in employer securities. The securities are leveraged and as the loan is repaid the securities are released. The salary deferral side of the KSOP has a menu of mutual funds plus the employer stock. Can the plan buy the stock from participants in their salary deferral account and use the proceeds to purchase the mutual funds? This would be done at the participant's direction.

[stephen]

What will the plan do with the stock? Sell it or transfer it to the company?

If the company is buying the stock you will need to have a valuation for each transaction date.

[mbozek]

Why would the plan engage in such a looney arrangement which would give the participants a put option to force the plan to buy back the stock at an appreciated value. In other words the plan would allocate the stock at 10 a share the participants would sell back at 15 a share and the plan would reallocate it and then the participants could sell it back at 18 a share, etc. There have been stock plans which have been whipsawed by participants who traded company stock in their accounts causing a loss to the plan. Before you offer such an option you better do a financial analysis of the such an option

[Kirk Maldonado]

Allowing employee money to be used to purchase employer stock raises serious state and federal securities laws issues.

[Guest dwerntz]

The stock that would be "sold" from the participants would be kept in the plan as leveraged and used to provide future profit sharing or matching contributions. The employer has been advised as to the problems with permitting the employees to sell out of company stock at a time that the company stock valueation is lower than in prior years.