1042 Sale

[Lori Foresz]

The ESOP document says all family members will be excluded from the plan starting with the year of the 1042 sale and for the next 9 years. I think I know the answer (or fear the answer) but does this have to apply or is the rule that the family members just can't be allocated any of the 1042 stock?

If the ESOP is buying the stock outright (with the existing cash in non family member accounts) and then makes a cash contribution, does the law precude the family members from getting a cash contribution under the ESOP?

Many thanks for all the help.

[RLL]

The plan document provides the rules for eligibility, participation and allocations under the ESOP, so long as such rules do not violate ERISA. But, of course, you knew this.

Maybe the plan document can be amended for future plan years. But also look at the stock purchase (and related) documents entered into in connection with the 1042 sale.

[Lori Foresz]

Thanks RLL. But what is the actual law? I see that family members can't be allocated stock (or anything in lieu of stock) after the 1042 exchange- but does the law preclude them from even getting a cash contribution under the plan? That is what I am struggling with.

Many thanks for your help.

[stephen]

They cannot receive cash in lieu of shares. Thus, if they cannot receive shares in the plan due to 1042 they cannot receive and allocation of cash in the plan to make up for the shares they are not receiving.

[RTK]

As noted earlier in the post, under ERISA, plan terms must be followed to the extent consistent with ERISA. Besides ERISA, a failure to limit the allocation as required by Code 1042 and 409(n) would have bad tax consequences. See also Code 4978 and 4979A.

I don't know what your document provides with respect to a 1042 transaction, but my reading of the Code requirements is that if stock is purchased in a 1042 transaction, the allocation limitation applies only to the ESOP assets attributable to that stock (or allocable in lieu of that stock). Thus, at least from the Code perspective, I think that a cash contribution unrelated to the 1042 stock (not used for the 1042 transaction or to repay any loan used to acquire 1042 stock) can be allocated to all participants.