Changing a 401(k) plan to an ESOP

[LIBERTYKID]

A 401(k) plan provides for salary deferral and matching contributions. There are 10 investment options, one of which is employer stock. Currently, less than 30 percent of all plan assets are in employer stock. In order to get a tax deduction for the dividends, it was suggested by an advisior to amend the plan to be an ESOP. The proposal is to treat the employer stock fund as the ESOP portion of the plan. The amendment would have the necessary restrictions and requirements to be an ESOP, but the plan design did not change. Participants can still elect to have deferrals and matching contributions invested in any investment, inlcuding employer stock.

How does this plan design meet the "primarilly invested" in employer stock requirement? Would the plan have to require at least that the matching contribution be make in the form of employer stock for it to be an ESOP? Any other issues?

[QDROphile]

This is a sham ESOP design. You are right to question it because it is bogus. However, the IRS buys the idea that the stock fund is the ESOP, so the ESOP is always 100% invested in employer securities. The concept passes the road test and many companies use it. Why not? It is a way to get essentially free deductions if you already have an employer stock fund.

[jpod]

QDROphile: Please explain further. Why is it a "sham" and "bogus" if the IRS says it's ok (and I agree that they think it's ok). Are you saying it is not a correct application of the law? You may be right about that, but what are the downsides of taking advantage of something permitted by the responsible administrative agency?

[QDROphile]

Discussion and debate at an old thread that started on November 12, 2001. Search the ESOP topic for "scam."