Sub-S Stock in 401(k) Plan

[Guest Thornton]

I have been contacted by an advisor representing a bank that wants to offer closely held stock as an investment option in its 401(k) plan. I haven't seen this in awhile. In fact, I have only had three plans with company stock, it was publically traded, and they got it out of the plan in light of current fiduciary conditions. I have never had a plan with privately held stock. According to the advisor, the bank would like to:

· Develop plan “Policies and Procedures”

· Have plan provisions could include % limits of stock allowed per account, i.e. 10% or 20%

· Limit purchases to purchasing stock through annual deferral elections and matching contribution elections

· Establish bank’s “right of first refusal” for purchasing participants shares who are selling

· Second “right of purchase” could go to existing shareholders

· Provide liquidity for plan participants guaranteed by bank “Re-purchase liability account” established outside the plan

· Restrict rollovers to IRA’s to maintain shareholder voting control

· Find custodian who will serve as trustee/fiduciary

· Establish stock valuation procedures

The assets in the plan are currently about $3,000,000 and daily valued.

1) Generally, does this make sense in todays fiduciary environment?

2) Do any of the bank's goals present fiduciary issues?

3) Would the bank be required to have a fidelity bond equal to the value of the bank stock assets or have an audit (there are under 100 participants).

4) As an investment option in a 401(k) plan, must the stock be registered?

5) Am I missing anything?

6) Any suggestions on resources for me to research this futher?

Thanks.

[QDROphile]

Check your exposure to unrelated business income tax.

[RCK]

Just curious: How do you daily value stock that is not publicly traded?

[A Shot in the Dark]

Your Post doesn't note the "S" Corp. Status, but your title does.

Ownership of "S" Corp stock is prohibitive in a qualified retirement plan other than an ESOP.

In 2004 the American Jobs Creation Act provided for a grandfathering of IRA's that held the shares of banks that wer organized as a "C" Corp. prior to converting to "S" Status.

[Guest Thornton]

Your Post doesn't note the "S" Corp. Status, but your title does.

Ownership of "S" Corp stock is prohibitive in a qualified retirement plan other than an ESOP.

In 2004 the American Jobs Creation Act provided for a grandfathering of IRA's that held the shares of banks that wer organized as a "C" Corp. prior to converting to "S" Status.

You don't daily value it. Quarterly balance forward the best that you can do.

[RCK]

Thanks, Thornton--the original post said the plan is daily valued.

[masteff]

Actually Thornton said the current assets are daily valued, which would not necessarily include the proposed asset of s-corp stock.

[Guest Sieve]

S corp stock can be owned by a qualified plan as a general investment (IRC Section 1361©(6)). That's easy to accomplish if there is no potential PT involved (i.e., the S corp stock, which is not employer securities, is purchased in an arm's-length transaction from an unrelated third party), but it's more difficult if the stock represents employer securities: the exemption from the PT rules which permits an individual account plan to purchase/sell employer securities from/to a disqualified person generally does not apply if the stock is S-corp stock, unless the purchasing plan is an ESOP (IRC Sections 4975(d)(13) and (f)(6)(A) & (B)(ii)). And there are special rules re: allocation of S-corp in an ESOP (which it sounds like this is) that prevent the holding of the S-corp stock from being a PT. (IRC Sections 4975(e)(7) (flush language) & 409(p)).

[Randy Watson]

S corp stock can be owned by a qualified plan as a general investment (IRC Section 1361©(6)). That's easy to accomplish if there is no potential PT involved (i.e., the S corp stock, which is not employer securities, is purchased in an arm's-length transaction from an unrelated third party), but it's more difficult if the stock represents employer securities: the exemption from the PT rules which permits an individual account plan to purchase/sell employer securities from/to a disqualified person generally does not apply if the stock is S-corp stock, unless the purchasing plan is an ESOP (IRC Sections 4975(d)(13) and (f)(6)(A) & (B)(ii)). And there are special rules re: allocation of S-corp in an ESOP (which it sounds like this is) that prevent the holding of the S-corp stock from being a PT. (IRC Sections 4975(e)(7) (flush language) & 409(p)).

Sieve, why can't I find any commentary confirming there's a PT in the case of a plan purchasing the employer's s-corp stock? I'm not doubting you, I'm just surprised I can't find anything in RIA or BNA etc... Any thoughts?

[Guest Sieve]

Perhaps it's because that exception to the exemption for sales of employer securities to individual account plans--the exception to the exemption requires the plan to be an ESOP--applies not to all sales of S corp employer stock to the plan, but only to sales by more-than-5% S corp owners or by a corporation owned at least 50% by an S corp owner. So, if the Plan purchases the S corp stock from the S corp employer, and the employer has no 50% or more owner, the exception to the exemption does not apply, and the employer S corp stock can be acquired by a non-ESOP.

That's what it looks like to me, anyway.