Sale of Employer Stock

[Randy Watson]

Is there any problem with the sale of qualified employer securities from a plan to the employer in exchange for a 5 year promissory note rather than a single payment in full? The note would bear interest at the applicable federal rate.

[austin3515]

I think you would need a PT exemption from the DOL. I think they'll want to weigh in on the rate of interest used. They'd probably go for it though, seeing as how they generally don't like er stock in the Plan.

[BeckyMiller]

I've had some experience with this issue. I am not aware of any similar PTE's that have been granted. (Not that I know them all.) If there are not any, you will have to go through the long form application, rather than expedited. You will need to prove the administrative necessity of this action. It won't be a slam dunk. As their name implies - employee benefits security administration. They are focused on the protection of the participants and not the convenience of the sponsor.

They are likely to request additional security and potentially require oversight of an independent trustee over the term of the loan. So, your client needs to measure those costs and the time involved when they decide whether to pursue the application.

[Randy Watson]

Couldn't the note be considered a "marketable obligation," which is a "qualifying employer security." If that were the case, wouldn't the exchange be permissible under 407?

[E as in ERISA]

How does this transaction benefit the employees? It sounds like they are still stuck with an interest in the employer so they are not getting entirely out of the risk immediately. Why can't they just buy the stock back slowly over a five-year period? (And the answer should include the statement that "it's in the best interest of the participants if....")

[Randy Watson]

Are you saying that the plan's sale of shares back to the employer without a note is permissible?

[Kirk Maldonado]

That's what is often done when an ESOP is terminated.

[Randy Watson]

Is this a special ESOP rule? Based on the earlier posts, it sounded like the DOL shoud be involved.

[E as in ERISA]

On an employer stock transaction, each element potentially needs to have a reason for a PT exemption. The more complex you make the transaction, the more likely it won't pass muster so buying stock back all at once and doing it with a note may make create more issues.

[Kirk Maldonado]

Randy Watson:

Read ERISA section 408(e).