elimination of cash option

[LIBERTYKID]

Publicly traded ESOP plan provides for distributions to participants in the form of cash or stock. It has been interpreted to mean that a participant who has shares of stock in his or her account can sell the stock and receive cash from the trustee, which has happened. The sponsor wants to terminate the ESOP and require participants to take the shares of stock in their accounts in kind, and eliminate the cash option. Can this be done? The regs don't seem to permit exactly this but if anyone has a different opinion let me know.

[GMK]

Check the Plan Document to see if the Plan can require participants to take the distributions in stock, or if participants have options.

For example, do the the participants have the right to elect whether they receive distributions in stock or cash, or some of each? Also, do the participants get a "put option" on stock distributed to them, which allows the participant to require the plan or the sponsor to buy back the stock during some specified period after the distribution?

[LIBERTYKID]

Check the Plan Document to see if the Plan can require participants to take the distributions in stock, or if participants have options.

For example, do the the participants have the right to elect whether they receive distributions in stock or cash, or some of each? Also, do the participants get a "put option" on stock distributed to them, which allows the participant to require the plan or the sponsor to buy back the stock during some specified period after the distribution?

the plan clearly permits participants to receive distributions in the form of stock or cash. It is publicly traded, so no put, but the company does buy back the stock during a period of time.

[GMK]

If the Plan Document says that participants can elect to take all or a portion of distributions in cash, I don't see how the plan sponsor can take that choice away. You have to run the plan according to the Plan Document.

Similarly, if the Plan Document says that participants can require the company to buy back the distributed stock, I don't see how you can deny them that right. If the company has full discretion about buying back stock, then this is not an issue here.

But others may know how to accomplish what the sponsor wants.

[david rigby]

This appears to be, first, "what does the plan say?", and second, "what amendment is permitted?"

You've answered the first question.

For the second, see Q&A1 (including example 8) in IRS Reg. 1.411(d)-(4):

http://ecfr.gpoaccess.gov/cgi/t/text/text-...229&idno=26

[RLL]

The plan document can be amended to eliminate the cash distribution option in connection with the termination of the ESOP, per IRC section 411(d)(6)©, the equivalent provision in Title I of ERISA, and the legislative history under the 1986 Tax Reform Act (which added such provisions to the IRC and ERISA).

[QDROphile]

I don't think the IRS thinks the statute has the same scope as a lot of ESOP professionals think, but it is unlikely that the circumstances in this post would be a test case. At lease one court case went with the statute over more narrow IRS regulations that had been recently issued, without discussion of the issue of scope and conflict with regulations.

[RLL]

The IRS has routinely permitted such amendments (through the determination letter process) in connection with the termination of ESOPs over the past 20+ years.