Form of Loan Repayment

[pompton]

Could a participant make a loan repayment in the form of stock? My thoughts are that the transfer of stock by a participant to a plan would be a transfer of title, with all attendant income tax consequences, but more importantly could also be a prohibited transaction. Any information or thought?

[ERISAnut]

I would say no because the issue is whether the amount is required or discretionary. In the event of a loan payment, that amount is required under the terms of the loan contract. Therefore, contributing stock in order to satisfy that obligation would create a prohibited transaction.

An obvious case where stock could be contributed to a qualified plan is where the employer makes a discretionary contribution in employer stock. Notice, that by discretionary contribution, I am implying a contribution where the funding requirements of 412(i) does not apply.

We all know of cases where the employer contributes a "matching contribution" to the plan. In those instances, that contribution of stock is actually governed by the document where the stock is not being contributed as a "bartering" tool with the plan.

[Guest mjb]

Why would a plan want to be hassled with having to take title to stock certificates and then having to sell them and incur transaction costs/market risk when the participant can sell the shares and give the proceeds to the plan? (The transfer of stock to the plan is treated a sale of the stock by the participant.) This a great exemple of just say no.