Employer Purchase of Stock from the ESOP

[Guest cphcs]

An employer desires to purchase stock from its ESOP to provide cash for distributions to participants that elect to receive cash instead of stock. The employer purchase of stock from the ESOP and the cash distributions to participants would take place after the year-end valuation is received, which is several months after the end of the year. The stock price used would be the year-end valuation price.

(1) If the employer purchases the stock using the year-end valuation price, is this a problem with the requirement that transactions between the plan and a disqualified person (in this case, the employer) be valued at the time of the transaction? (Participants are not prejudiced, as they are to receive the value of the stock as of the most recent valuation date.)

(2) If so, how do employers that purchase stock for this purpose deal with the disconnect between the year-end valuation date and the date the valuation is actually received?

[RLL]

In order for the employer's purchase of stock from the ESOP to be exempt under ERISA section 408(e) and IRC section 4975(d)(13), the purchase price must be not less than "fair market value" as of the purchase date.

The ESOP fiduciary responsible for approving the sale of stock by the ESOP should have advice/opinion from its independent appraiser to determine whether there has been any increase in value since the year-end valuation date. If there has been an increase, the fiduciary must determine (based upon an updated appraisal) the updated fair market value as of the purchase date to assure compliance with the "adequate consideration" requirement.

An alternative approach to the distributions is for the ESOP to distribute shares to participants and have the employer repurchase the distributed shares at the most recent year-end valuation price.