timing of employer stock distribution

[Luis Miguel]

An employer sponsors a 401(k) plan which has some company stock. Can the company treat the distribution of company stock differently than other assets of the plan? For example, one employee who has company stock over "X amount" receives his benefit over 5 years, whereas another employee who does not have company stock, or has company stock below "x amount", can receive his benefit immediately. It would seem that the company is treating employees different just because the company wants to limit its buy back of company stock on an annual basis. This is not a publicly traded company and this is not an ESOP.

[A Shot in the Dark]

Luis:

I presume your example client is a privately held employer. I am also assuming that the appropirate diversification procedures are being followed, required distributions are being made timely, and that the plan document includes the appropriate language.

With that being said, the answer to your question is yes. Often times you will find plan sponors of ESOP's or KSOP"s creating a written distribuiton policy that dictates the timing of a distribution based upon the size fo the vested account balance and reason for distribution. When drafting the grid of the distribution policy think of a worksheet, whereby each row defines the reason:

1. Death

2. Disability

3. Retirement

4. All Other

The columns would be vested account balance. Generally, as the account balance increases in size, the length of time in which the distribution begins an the lenght of time over which the payout is made is inreased.

And again, the distribution policy is developed so that no laws are violated.

Dale

[Luis Miguel]

Dale,

It is my understanding ESOPS work within a totally different framework and that the rules that apply to ESOPs do not generally apply to other types of defined contribution plans. Would it matter that the only type of investment that is extended over a 5 year payout schedule are those with employer securities? Those who do not have employer securities get all their payout at once regardless of the amount of $$.

Also, would the fact that the plan was originally written to provide benefits in a lump sum distribution, but now it has been amended to stop providing this lump sum, bring into play ERISA's anti-cutback rules?

[Luis Miguel]

Dale,

It is my understanding ESOPS work within a totally different framework and that the rules that apply to ESOPs do not generally apply to other types of defined contribution plans. Would it matter that the only type of investment that is extended over a 5 year payout schedule are those with employer securities? Those who do not have employer securities get all their payout at once regardless of the amount of $$.

Also, would the fact that the plan was originally written to provide benefits in a lump sum distribution, but now it has been amended to stop providing this lump sum, bring into play ERISA's anti-cutback rules?

[Guest Sieve]

I don't see any reason why the plan cannot pay certain distributions in a lump sum and others over 5 years, assuming (i) that there is no ongoing employer discretion in determining who gets which distribution form (&, based on what you say there is no such employer discretion), and (ii) that the plan is not amended, from time to time, to cause a favorable distribution method to be discriminatory. However, the lump-sum option cannot be eliminated with respect to benefits earned BEFORE its elimination--the elimination can be propsective only, for amounts earned AFTER the elimination.

[Luis Miguel]

I don't see any reason why the plan cannot pay certain distributions in a lump sum and others over 5 years, assuming (i) that there is no ongoing employer discretion in determining who gets which distribution form (&, based on what you say there is no such employer discretion), and (ii) that the plan is not amended, from time to time, to cause a favorable distribution method to be discriminatory. However, the lump-sum option cannot be eliminated with respect to benefits earned BEFORE its elimination--the elimination can be propsective only, for amounts earned AFTER the elimination.

You used the word "discriminatory". If the plan was set up so that all those above 5k will be paid out in installments and all those under 5k will be paid out in lump sum, then that would seem to be impartial as that affects everyone regardless of what type of assets you have in the plan. In the hypothetical, however, participants are not treated the same across the board. You have different payments based on the type of investment. Isn't that discriminatory?

[Guest Sieve]

Features such as this are tested for discrimination based on both current availability and effective availability under the regs, and you would have to analyze the discriminatory impact of the limitation you mention. The disrimination that is not permitted is discrimination in favor of HCE's (highly compensated employees--basically, those earning in excess of $100,000). The provision you mention MAY be disriminatory, but someone would have to test for that. If the provision continues in force, and is not changed in the future, then it may not be discriminatory when viewed from a distance. For example, $5,000 may be a value reached by virtually everyone in the plan longer than X years, and most people stay that long, and the stock value has been steady, etc., etc., so that it does not discriminate in favor of HCEs.