Cash distributions to 4975(e) disqualified persons

[Guest tmills]

It seems accepted that if a 4975(e)(2) disqualified person exercises a put option, the plan has to obtain a current stock value to make the payment. The question is, does the current value requirement only apply to the put option or any cash distribution of shares in a disqualified person's account? 54.4975-(11)(d)(5) says in the case of a transaction between the plan and a disqualifed person, value must be determined as of the date of the transaction. That would seem to require any payment made to a disqualified person for his shares not be done until a current value is obtained. I don't recall seeing this in documents (except relating to the put option), but we know that doesn't necessarily mean anything. Any thoughts would be appreciated.

[Übernerd]

I have a similar question and so am resuscitating (zombifying?) this old thread.

Company A’s S-Corp ESOP distributes only cash and has an annual valuation date. Company A’s by-laws restrict stock ownership to the ESOP and current employees (who cannot receive distributions from the ESOP).

§ 54.4975-11(d)(5) says that for transactions between an ESOP and a disqualified person, the valuation date must be the date of the transaction.

Is the liquidation of stock within the plan a "transaction" for this purpose, such that new valuation is necessary every time a disqualified person retires? This seems ridiculous, but I can’t find an exception to the general rule. Any comments appreciated.

[QDROphile]

The sale of shares by the plan to the company is a prohibited transaction and must find an exemption no matter who the distributee is. In other words, a contemporaneous valuation is required.

If the ESOP holds cash and exchanges shares allocated to the participant for the cash in other accounts (if that is what you mean by liquidation within the plan), there is no prohibited transaction.

[Übernerd]

Hmm, I've just been schooled by someone so senior that he still looks at paper books, and the Code, no less. There's an exception to the prohibited transaction rules for "receipt by a disqualified person of any benefit to which he may be entitled as a participant . . . in the plan," so long as calculations are performed the same way for all participants. IRC § 4975(d)(9).

So I guess there is no contemporaneous valuation required for a cash distribution from the ESOP.

The sale of shares by the plan to the company is a prohibited transaction and must find an exemption no matter who the distributee is. In other words, a contemporaneous valuation is required.

If the ESOP holds cash and exchanges shares allocated to the participant for the cash in other accounts (if that is what you mean by liquidation within the plan), there is no prohibited transaction.

[QDROphile]

I think you should think more. The distribution is one thing, and the exemption applies to the extent the distribution is a prohibited transaction. The transaction that generates the cash is a different transaction; it does not involve the disqualified person and the same concerns attend for distributions to persons who are not disqualified persons.