Eliminate Pass Thru Voting

[Tot]

Private company ESOP was funded with a section 133 loan. Section 133 required pass thru voting on all matters. Loan has been repaid in full (i.e., no 133 exclusion is now being claimed). Can plan now eliminate pass thru voting on all matters and limit it to only those matters described in 409(e)(3) (merger, etc.)?

[BeckyMiller]

Hmmm... interesting question. The reference in 133 to voting rights specified that the loan would not qualify unless the expanded voting rights were applied. But in defining the voting rights, it described what the ESOP had to provide with respect to the rights of the securities acquired with the loan.

IRC Section 133(b)(7) VOTING RIGHTS OF EMPLOYER SECURITIES. --A

loan

shall not be treated as a securities acquisition loan for purposes of this section unless --

(A) the

employee stock ownership plan

meets the requirements of section 409(e)(2) with respect to

all employer securities acquired by, or transferred to, the plan in connection with such loan (without regard to whether or not the employer has a registration-type class of securities)

, and

(B) no stock described in section 409(l)(3) is acquired by, or transferred to, the plan in connection with such loan unless --

(i) such stock has voting rights equivalent to the stock to which it may be converted, and

(ii) the requirements of subparagraph (A) are met with respect to such voting rights.

So, if the loan is paid off, it seems like you don't care about the status of the loan anymore and you may be able to amend the plan to revert to the general voting rights on the shares. But, I don't know that the government would be forestalled from arguing that the expanded voting rights applied to the shares acquired with the loan, rather than just for the term of the loan.

Fence sitting, aren't I? I am going to irritate you further by saying that I think there is sufficient ambiguity that you should check with experienced ERISA counsel and perhaps either go for a letter ruling or make the amendment and highlight in your determination letter application. Note, I did look briefly at 411(d)(6) and the associated regulations and do not see where voting pass-through is a protected benefit. But this is free advice, so you need to check into that, also.

[Tot]

Another argument that plan can eliminate these voting rights is that in the 4975 regulations, when the IRS wants the rights to continue to exist following a change in facts, the regs so provide (i.e, the nonterminable protection and rights).

Although different, but by analogy, if plan wasn't required by section 133 to provide complete pass thru voting but the provisions of the plan nonetheless did, couldn't these extraordinary rights be eliminated so that only the statutory voting rights are provided?