401k and company stock

[Guest jefbwerner]

A privately held company serves as its own 401(k) Trustee (and Custodian) and wants to offer its stock as an investment option for participants. In order to accomplish this, they have elected to allow participants to self-direct to any investment (stocks, bonds, etc. Theoretically, one of which may be company stock). Their belief is because employees can buy any stock, they can offer their own. But, as a very closely held stock, shares will not generally be available to just anybody (shares would have to be purchased from an existing owner without the involvement of a broker - treasury shares would not be made available). Is there a problem with this? In particular, because employees are technically able to purchase company stock (though in reality will not have the opportunity), is the company covered w/ regard to ERISA? Particularly, if it results in only HCEs having the opportunity to purchase company stock?

[MoJo]

Oh boy.... Well, apart from the inherent dangers of company stock, be careful that the purchases and sales of the stock are not prohibited transactions. Remember that even if a participant directs that a purchase be made, the actual purchaser is the plan, and seller, if a party in interest, the transaction would be a pt....

[Kirk Maldonado]

There's an exemption from the prohibited transaction rules, provided certain conditions are met. The big problems are federal and state securities laws. You better get a competent securities lawyer involved.

[Guest Tom Geer Daily Access Concepts]

The issues here are dramatically effected by securities laws. The company is taking risks that they are selling to beneficial owners in violation of either or both of the registartion and disclosure rules, under both state and federal laws. Unless the company is fairly large or has a compelling business reason, they probably don't want to cross those lines, either accidentally (and so incurring exposure) or deliberately (and so incurring cost).

If they limit the stock to those who could buy it under applicable securities laws, they have to deal with Regs. 1.401(a)(4)-4((e)(3)(iii), which makes the right an optional feature subject to the nondiscrimination in optional benefits, rights and features regulations. Normally, inability to buy a specific investment resulting from factors extraneous to the terms of the plan is not a major problem, but IRS has always approached employer securities differently, and this approach was a problem before the Reg. was issued if the employer securities did better than the general plan assets.. If only HCEs have the right, they are likely to have a problem.

There are lots of other ways to get participants equity stakes, without any discrimination issues and with much reduced securities and control issues. These include options, shadow stock/SARs, stock bonus/restricted stock and perfomrance units. If the desire is to get employees yo have a stake in overall company performance, they should look at these options.

[MWeddell]

Lots of issues presented by this question. One not previously mentioned is that under most states, only certain corporations (such as banks) may act as trustees, so the plan sponsor shouldn't be the trustee.

The fact that company stock is purchased through a self-directed account has no bearing on whether there's a prohibited transaction.