Employer stock in a 401(k) plan.

[Guest Vons]

I have a plan that wants to include the

investment option of "any stock of participant's choice". Then 2 HCE's want to purchase a retiring partner's

Employer stock with part of their 401(k)

money. Would this be permissible? The

retiring partner would not sell this

stock to any employees other than the

two HCE's.

[MWeddell]

None of the legal rules change just because the purchase of company stock was done through a self-directed option.

Hence:

- Stock must meet definition of qualifying employer security (which it does)

- If > 10% of plan's assets will be invested that way, make sure the plan document says that's OK. See ERISA 407(B)(1), 407(d)(3)(B).

- Prudence and diversification fiduciary duties still apply, although again a well-drafted plan document helps.

- Special ERISA 404© rules, if you're trying to comply with ERISA 404©.

- Make sure the plan itself doesn't restrict the chance to purchase company stock to just the two HCEs or else there's a discriminatory benefit, right, or feature issue. Sounds like the seller of the stock won't sell to others, which probably prevents the plan from being discriminatory.

- If you allow non-publicly traded securities to be acquired by HCEs, you need to allow this for NHCEs to. Sounds difficult administratively and your trustee may object.

[Guest gpr]

Not as difficult to administer as some would believe. I have worked for a firm that has automated recordkeeping and trust accounting for self-directed accounts and it is working VERY well. There are a lot of other considerations besides recordkeeping and trust accounting of course, but once everything is in place it's wonderful. However, it's also somewhat expensive, so it's not for everyone.

[Dave Baker]

CAUTION: It's not an "S" corporation for tax purposes, is it?

[Guest ESOPwizard]

If the plan holds non-publicly traded employer stock which was purchased with 401(k) contributions, are there any SEC issues or reporting requirements?

Make certain that you go over the prohibited transaction rules carefully, and if you won't have a problem with the acquisition, have you figured out what will happen when the two HCEs retire?