Types of ESOP distributions

[Guest bdemalignon]

I know that ESOPs are required to allow distributions in the form of employer stock and cash, but is there anything that would prevent an ESOP from making an in-kind distribution that is not employer stock (a property interest, for example) as long as they had the consent of the distributee?

[Guest tmills]

I know that ESOPs are required to allow distributions in the form of employer stock and cash, but is there anything that would prevent an ESOP from making an in-kind distribution that is not employer stock (a property interest, for example) as long as they had the consent of the distributee?

I think the first thing that would prevent it is the plan document. I'm sure cash and/or stock are all it permits.

[Guest bdemalignon]

Suppose, though, that there were no restrictions- for example, if the plan were amended to allow other forms of distributions. Nothing would prevent another form of distribution in that case then, would it?

[QDROphile]

1. The law does not require ESOPs to distribute cash.

2. Apart from the participant's ability to demand distribution in employer securities, subject to some exceptions, ESOPs are governed by the qualified plan rules and no special rules apply to medium of distribution.

3. Your question raises suspicions.

[Guest tmills]

Suppose, though, that there were no restrictions- for example, if the plan were amended to allow other forms of distributions. Nothing would prevent another form of distribution in that case then, would it?

How would you value a property interest and show that it is equivalent to the participant's plan interest? Sounds expensive. Of course you couldn't force this form, the participant would have to select it. The option would have to be offered to all. The whole thing sounds technically doable, but needlessly complex.

[GMK]

You may also need to consider:

who contributes the property interest to the ESOP?

how is the property interest allocated to participants' accounts?

who controls the use of the property interest while the ESOP owns it?

what happens to income generated by the property interest and who pays its expenses (if any in both cases)?

is the ESOP prepared to accept the property interest as an asset for a longer period of time in the (apparently unlikely) event that the person changes his/her mind about accepting it as a distribution?

what if another participant requests a distribution in the property interest (or a part of it) before the original distributee asks for it?

None of these issues may be relevant to your particular case, but it is hard to tell how many worms are in this can before it is opened. Your benefits lawyer may have some valuable insights.