KSOP transfer of non-employer stock assets

[Guest astonewall]

Is there a prohibition against transferring non-employer stock assets from the ESOP portion of a KSOP to the 401k portion? The KSOP in question will not receive any further contributions of employer stock. There is no encumberance. The plan sponsor is a sub-s corporation that pays very significant dividends on the stock.

The plan sponsor would like to get the dividends moved to the 401k portion of the plan to more easily facilitate participants self-directing the investment of these funds and to get away from a future possible problem of the ESOP not being invested primarily in employer stock (knowning this may or may not be a real problem). The question is whether there is any reason making such transfers is not permissible or advisable.

[stephen]

If it is all one plan and available to all employees on an equal basis it seems ok.

Things to think about:

How will the repurchase obligation be handled in the ESOP if all of the cash is transferred to the 401(k) portion?

Will you allow 401(k) portion to be transferred back to the ESOP.

[Guest astonewall]

Steven,

Thanks for your answer and your insights. My research leads to the same conclusion, that it "seems okay" but I cannot find anything definite one way or the other.

Repurchases will be handled by first depositing each year's dividends in each participant's cash account in the ESOP, transacting all stock sales/purchases, then transferring remaining balances to the 401k portion of the plan.

[QDROphile]

You might take some comfort from the letter rulings that are the basis for so many public companies turning the company stock investment fund option within their 401(k) plans into ESOPs. The ESOP portion of the plan is defined as the fund with company stock, to the extent of the company stock. The ESOP waxes and wanes according to the investment elections of the participants. The new 401(k) regulations facilitate operations under this point of view by changing the rules on aggregating ESOPs for ADP testing. I think the whole idea is intellectually bankrupt, but it is now quite well established. Other threads on the board have discussions about the phenomenon.

The point for you is that you can make the ESOP whatever you want as long as the artificial basket you put it in is primarily invested in company stock. If you define the ESOP as whatever part of the plan happens to be company stock, you can't fail. If you were not dealing with an S corporation I might wonder about whether the participant has a right to take a distribution of the dividends in the form of company stock. But I might wonder about such niceties because I still don't believe an ESOP can be defined simply by how assets are invested from moment to moment.

[Kirk Maldonado]

It seems that the right to demand that benefits be distributed in the form of employer stock would continue to apply to the portion of the ESOP that transferred to the section 401(k) portion.

[QDROphile]

An S corp ESOP does not have to distribute employer securities. That is what I was getting at with the comment about the participant's right eventually to get the dividends distributed in the form of employer securities. Public company KSOPs usually allow the participant to move the entire balance into the stock fund before distribution, thereby assuring that all amounts are distributable in company stock if the participant wants the stock.

[Kirk Maldonado]

QDROphile:

Good point. That's so obvious I'm seriously embarrassed at having missed it.