Put option exercised by disqualified person

[Guest PiggyBank]

Here's the scenario:

1. Disqualified person exercises put option with respect to qualifying employer securities distributed from ESOP.

2. Employer does not wish to purchase the qualifying employer securities from the disqualified person.

3. ESOP provides employer may permit trustee of ESOP to purchase the qualifying employer securities.

Question: Even though the ESOP provides the employer may permit trustee to purchase qualifying employer securities when participant exercises put option, wouldn't the trustee doing so when the participant exercising the option is a disqualified person result in a prohibited transaction? Is there a way for the trustee to honor the put option and yet avoid a prohibited transaction? Or must the employer honor the put option since the trustee may not do so?

[QDROphile]

The trustee can purchase the shares by complying with the PT exemption for purchases and sales of employer securities. The ususual rub is the need for a contemporaneous valuation. The cost of the valuation increases the effective purchase price, although the trust does not have to bear the cost of the appraisal. The trustee also has to determine that the purchase is in the best interests of participants. Covering for the employer is not necessarily in the best interests of the participants.

[RLL]

Why didn't they just make a cash distribution from the ESOP?

If the shares have already been distributed, why would the trustee want to now repurchase the shares? The trustee should not purchase the shares unless it's absolutely clear that the value has not decreased since the valuation date (as of which the put option price was set). If it's clear that the value has increased, it may be a good deal for the ESOP to be purchasing shares at the lower put option price.