ESOP non leveraged stock

[Guest jwill]

My client has a non leveraged ESOP where the plan document specifies that until an Annuity Start Date, meaning NRD, disability, death or 1 year after term date, the account will be maintained in the Trust. After the Annuity start date, but before the actual distribution date, the Participant's account shall not be revalued. There is only ER stock in these accounts. If the stock price rises $10 per share, can they legally say to a terminee, you are not entitled to the current market value?

I especially don't like this because my software gives terminees the market value of the stock. My only work around would seem to be to define terminees stock as a different class of stock.

[BeckyMiller]

I do not think that this can be done if there is any substantial time passed from the annuity start date to the actual distribution date. (I find it odd that an ESOP uses the concept annuity start date, too....). It may be that the drafter was simply trying to avoid anyone saying that balances should be recalculated from the anniversary date to the distribution date, which frequently is several months later for an ESOP. But, if there is any risk that an anniversary date would intervene between the annuity start date and the actual distribution date, I know of no authority for any plan, including an ESOP, to freeze values in this way. If they want to eliminate the participant from the risk of changes in share price, they should explore their options for converting the stock into other assets, pending distribution. The government is also somewhat touchy about this action, but I think it can be done without violating the Code or ERISA, if you pay attention to protecting the rights of the participant.

We should wait to see if RLL chimes in and tells me I am all wet.

[stephen]

Becky,

I don't think RLL will disagree with you on this one. If he does we are both all wet as I agree with your comments.

Stephen

[Guest jwill]

Becky,

I don't think RLL will disagree with you on this one. If he does we are both all wet as I agree with your comments.

Stephen

Is there any cite I can give the client? Their attorney agrees that they can do this.

-JWill

[stephen]

ESOP Distributions: The Cash-Out Dilemma

Perhaps this article can get you started in the right direction.

[BeckyMiller]

Well, consider Rev. Rul. 96-47 and the significant detriment theory. In this case, the suggestion apparently is to deny former employees the right to share in any earnings. To me, that seems to be a significant detriment.

[Guest jwill]

Well, consider Rev. Rul. 96-47 and the significant detriment theory. In this case, the suggestion apparently is to deny former employees the right to share in any earnings. To me, that seems to be a significant detriment.

Thanks. I think we have convinced the client that the possible exposure to law suits would make it worthwhile to amend the plan. Besides, the "Annuity Start Date" is really when the terminee elects to take a distribution.

[BeckyMiller]

So - did legal counsel concur or did the client just decide they didn't want to deal with the risk that you might be right? I am curious about the statutory authority, if any, counsel provided for saying this was permissible. But, it is simply curiousity....I don't need to know.