status of in-service transfer balances when going public

[Guest kimble46]

Company A will soon go public. Some of the executives will be allowed a number of shares proportional to their annual production, other factors and the balances in their 401k plans. The plan allows for in-service transfers and several qualifying executives have taken them. Is there any prohibition of the firm considering the in-service transfer balances as part of said employees' 401k accounts for the purpose of allocating the shares among the various executives? It is assumed that all in-service balances were recently transferred and that no comingling with other rollover monies has taken place.

[J Simmons]

Some of the executives will be allowed a number of shares proportional to their annual production, other factors and the balances in their 401k plans.

Since the 401k balance is the result of elective deferrals, at least in part, you should be concerned about the impact on the 401k plan's qualification of keying the number of shares off of those balances, and indirectly at least then off of the elective deferrals. See IRC § 1.401(k)-1(e)(6). Some exception might apply; I'm just not aware of it.

[Guest kimble46]

Some of the executives will be allowed a number of shares proportional to their annual production, other factors and the balances in their 401k plans.

Since the 401k balance is the result of elective deferrals, at least in part, you should be concerned about the impact on the 401k plan's qualification of keying the number of shares off of those balances, and indirectly at least then off of the elective deferrals. See IRC § 1.401(k)-1(e)(6). Some exception might apply; I'm just not aware of it.

Thank you for your reply. I may have misstated my question. My client is one of the executives, not the employer. I assume the employer will seek competent counsel before implementing any stock distribution plan. Further, The participant's 401k plan balance is only one of a number of factors in determining how many shares will be granted or sold to executives and others when the firm goes public. Finally, the shares will be individually owned and not part of the plan or an ESOP or any other such arrangement. The participant would like to have his in-service balances counted as a part of his 401k "account" for the purposes of determining his stock allocation under the theory that, 1) the in-services balances originated from the 401k account, are housed in separate IRA rollover account(s), and are not comingled with any other non-company rollover assets, and 2) the executive continues to contribute to his 401k account. The executive would like to know if there is any specific prohibition on allowing his employer to consider his in-service balances as a part of his 401k plan for the purposes of the contemplated stock distribution.

[rcline46]

I will confirm what J Simmons said, NO OTHER BENEFIT CAN BE CONTINGENT ON THE ELECTIVE DEFERRALS (matching contributions excepted). This is very clear in the regulations. The employer could be asking for problems by using the deferral account in their calculations.

As for determining stock grants based on various conditions, I doubt there is any direct guidance of any kind anywhere.