Employer Stock for Matching Contributions

[Guest FergyJR]

Would like some thoughts regarding an Employer Match to be done with Employer Stock. The question came up between stock on the open market and that of treasury stock. If treasury stock is used, could this be a possible prohibited transaction? Taking this a little further, if an employee wanted to sell other funds and invest in the treasury stock. This is not an ESOP, but a 401(k) plan. I've not run across any plans yet that have treasury stock and am not sure of the answer.

[MWeddell]

It sounds like you've got two possible transactions that ought to be discussed separately: (1) an employer contribution of treasury stock to a profit-sharing plan and (2) the purchase by the plan of treasury stock from the employer in order to accommodate a request by a participant to invest in company stock.

(1) The legality of the employer contribution is governed by DOL PWBA Interpretative Bulletin 94-3. If the profit-sharing plan merely provides that the employer has discretion to make a contribution, then contributing treasury stock is fine. On the other hand, if the profit-sharing plan's plan document requires a certain level of contribution, then the contribution of treasury stock is viewed as equivalent to a contribution in cash and then a purchase by the plan of stock from the employer, which is a prohibited transaction. Bottom line is the employer can do this but might need to amend its plan document to clarify that the contribution is discretionary.

(2) The purchase of treasury stock by the plan generally is a prohibited transaction. I don't know of any PT exemptions, but I certainly don't claim to know them all. In general, the plan should be buying stock on the open market not from a party-in-interest. If the stock isn't publicly-traded, there may be other securities law concerns raised by letting participants have an investment choice about whether to invest in company stock.

[QDROphile]

Prohibited transaction exemption for employer securities at ERISA sect. 408(e). You will need advice about securities law compliance whether or not the stock is publicly traded and whether or not participants have investment choice.