Basic questions - KSOP use in acquiring S Corporation

[Guest Msakr]

This is, I think, a fairly newby question. I am not 100% sure what is relevant, so I'm going to be overinclusive in my description. I apologize for both problems in advance.

Company A (a service business with around $3M in revenue) is being acquired by Company B, a new S corporation, via asset sale. As part of the sale, either a new retirement type plan will be established (looking at a KSOP) and existing employees allowed to roll their existing 401k into the KSOP or the existing 401k plan will be transferred (to the extent possible) to Company B (and thereafter the 401k plan converted to a KSOP). Company B intends to honor all accrued vacation, seniority, etc. according to the policies of Company A. The 401k plan of Company A currently does a safe harbor match, I believe, and does not invest in the securities of Company A.

The new owner is investigating alternatives to provide long term incentives for the various employees. The new owner also has an existing IRA outside of the company which he might consider rolling into the KSOP to the extent to which he could then use it to buy stock or lend monies to the corporation. The new owner is aware that all participants in the KSOP (basically all employees) have to be given the same opportunity -- and does not regard that as a real issue of concern.

My confusion starts when I look at the rules for who can hold stock in an S corporation. It is my understanding that generally a 401k plan is not allowed to hold stock in an S corporation. So, in order to invest roll over monies into the company via a rollover of an existing IRA into a 401k, the usual requirement is that the new corporation must be a C corporation. This leads to my first questions:

1. Can the rolled over monies from the new owner's old IRA be used to purchase stock from the S corporation, provided the KSOP is set up correctly?

2. I guess another way to say the same thing is can the KSOP be used by the new owner to sell the stock to himself in the KSOP structure?

3. Can the rolled over monies from the new owner's old IRA be used to purchase bonds from/provide debt financing to the S corporation?

4. Does the answer to #3 change if the funds are then loaned by the S corporation to the ESOP to purchase company stock from the new owner?

5. Can the rolled over monies from the new owner's old IRA be used as a loan directly to the ESOP portion of the KSOP plan?

6. To whom and on what basis can the ESOP stock be allocated?

7. Do any of these answers change to the extent the new owner retains at least 50% interest in the S corporation outside the KSOP structure?

1-5 I believe should be fairly simple for someone unlike myself who knows what they are doing in this arena. 6 & 7 look more complex to me.

Quick disclaimer -- I'm looking for a broad strokes approach as to what is possible. I fully recognize that implementing any of the above may turn out to be a stone cold !$@# and not practicable for a company of this size and magnitude. Any response in this thread is strictly intended as a basis for talking with professionals (accountants/attorneys) who specialize in this area.

Thanks you in advance for any replies.

[QDROphile]

If the ESOP will allow participants to choose to have rollover amounts or elective deferrals invested in employer securties, then you need to look into compliance with securities law. If rollover or transfer amounts will be invested in employer securities without participant direction, then you need some serious consideration of fiduciary issues.

[Guest Msakr]

I was thinking that the ESOP would have participant directed investments, much like a 401k plan. I understand the securities laws issues a lot better than I understand whether the ESOP could offer participants the option of rolling over funds to invest in (i) the stock of a S corporation or (ii) subordinated bonds issued by the S corporation. From a layman's point of view, there appear to be a number of traps that need to be dealt with even before you get to the securities registration issue ... or am I over thinking it?

Thanks!