S-Corporation cash distributions to participants.

[Guest jigpsu100]

I have a situation where the ESOP only owns a portion of the S-Corp. As time goes on and distributions to the shareholders (including the ESOP) are made, I won't be able to maintain the "primarily invested in employer securities test." Would I be able to make a cash distribution to all participants of their share of the earnings? Maybe through an In-service withdrawal? Would it be subject to 72(t)?

[Guest tmills]

I would think you will need at least a portion of the cash to buy shares from terminating participants. In some years that can eat up a lot of cash.

[E as in ERISA]

If that doesn't work, a portion of the plan could become a non-ESOP and you could preserve the ESOP status of the other portion?

[Guest jigpsu100]

Thank you for the suggestions, both are possibilities. I also read PLR 199906044 which describes a similar sitaution in which the employer set up an "in-service distribution arrangement" making a voluntary once a year distribution of the cash amount. The service expressed no opinion on the arrangement (neither positive nor negative). Do either of you know if this is allowed? If it would work I fully expect enough people to take advantage of it (even with the 10%) to make my percentages work.