Can a Plan Sponsor issue a promissory note on distribution?

[Guest KoreAmBear]

. . . for all of the participant's qualified employer securities portion of his account in cash? Does the note have to have adequate security like ESOP sponsors must procure in amortizing its put option pay out?

WL

koreambear@yahoo.com

[dmwe]

I've seen notes payable to participants who put their stock back to the company that pay a representative rate of interest but I've never seen then backed by any collateral.

[GBurns]

What do you mean by "put their stock back to the company "? How is that done?

Why would interest be paid instead of dividends?

On what would the interest be paid and how is it calculated?

[Locust]

Wouldn't payment of a note be a loan from the participant to the plan - a prohibited transaction?

[BeckyMiller]

ESOPs provide very formal rules regarding the distribution of employer securities. It is permissible for the plan to distribute stock. If the stock is not traded, the plan sponsor has to offer the participant a put option. The plan may offer the put. For a lump-sum distribution (or other distributions of pre-1987 shares, if plan permits), the purchase price can be paid in installments. The put option note must bear reasonable interest and must be secured. See IRC Section 409(o) and (h). There are no regulations describing these rules. There are some old regulations in 4975, but the conditions are different under Section 409. There are a lot of letter rulings out interpreting these rules. Also, look at the legislative history.

[Kirk Maldonado]

BeckyMiller:

Inasmuch as those rules are for ESOPs and we apparently don't have one here, do you think that the 409 rules would be binding on the employer?

[BeckyMiller]

Thanks Kurt - critical reading is an art, which I apparently failed to apply to the original post.

I agree that for a non-ESOP, 409 would not apply. BUT, once the stock is distributed from a non-ESOP plan in complete liquidation of the participant's account, I would think that ERISA would no longer apply. So, the employer would be able to offer liquidity to plan participants in some reasonable manner without tripping over the prohibited transaction rules. Kurt would have a better idea of any state or federal security law matters that might come in play in the employer offers to purchase or offers a put on such securities.

I should let you know that we recently worked with a business that distributed illiquid securities to a plan participant without providing any means to create liquidity and the state attorney general sued the plan sponsor under a securities law violation. I suspect the IRS might have some fiduciary conduct concerns, too.