Underwater ESOP

[Guest CitationSquirrel]

Greetings,

I was wondering if anyone else has run into this problem yet.

I have a leveraged ESOP that just became leveraged in 2007. So, its two years into its loan. For 2008, the value of the stock dropped over 20%. Now, if you look at the net assets of the plan, the value of the plan is negative.

My question is how do I report this on the 5500? Is it ok to have a negative value? Do I leave the Schedule I out of balance?

Any help you can provide would be greatly appreciated.

[Marcus R Piquet]

CitationSquirrel,

This happens all the time, in fact more often than not. It's sometimes referred to as the "post-transaction drop in value." It is perfectly acceptable to report negative equity on the Schedule I/H. The plan's liabilities do, in fact, exceed its assets. Within a few years, as the debt is paid down and the company grows, the stock will hopefully recover in value and the plan's net assets will become positive again.

Best,

Marcus