Best distribution option for a company that does not have enough cash to pay

[Guest sugar daddy]

If a company's ESOP has terminated participants with significant account balances and the company is currently cash poor, would the best option be to distribute the shares to the participant?

Also, can the plan sponsor pick n choose which participants get paid out in shares?

[GMK]

If the Plan Document says you can do these things, then you can do them. This assumes that individuals are allowed to own shares, but if they aren't, the alternatives will be detailed in the Plan Document.

Check on Put Option features for distributions in shares. If a participant who receives a distribution in shares can put them to the company, then the company will have to come up with the cash, which is what you're trying to avoid. (Again, see the Plan Document for details on Puts and on the conditions and options for the timing of distribution payments.)

[ESOP Guy]

The put option right as mentioned is going to make paying in shares not much benefit. They need to see if they can delay payment under the document/distribution policy.

They might have some flexability on whose shares they are going to pay in shares vs leave the shares in the plan.

[Guest sugar daddy]

If the plan sponsor is "cash poor", could they not distribute the shares and then buy the shares back from the terminated participant over a period of time, therefore avoiding having to pay distribution in one lump sum?

[QDROphile]

The rub is the requirement to provide adequate security. The installment payment option is only available for lump sum distributions. You might do just as well with distributions in the form of installments.

[GMK]

If the plan sponsor is "cash poor", could they not distribute the shares and then buy the shares back from the terminated participant over a period of time, therefore avoiding having to pay distribution in one lump sum?

Possibly yes. Again, read the Put section of the Plan Document.

You may find that if the entire account balance is distributed in one taxable year (which seems likely in your case) and if the participant puts the shares to the company, the company may have the option to spread the payments out over up to 5 (I think) years. If the account balance is not all distributed in the one year, then the company pays in something like 30 days.

And your Put section will also include the clause that QDROphile has just noted of the requirement for adequate security and a reasonable interest rate on unpaid balances.

[Guest sugar daddy]

the plan allows for distributions to be made in cash, installment payments over a period of 5 years if the balance is over $5000 but does not exceed $800,000, company stock or both cash and company stock.

The plan has never made a distribution in stock.

Would a downside to making cash installments be the fact that if a dividend was issued each plan year, the terminated participant would receive a portion of the dividend based on remaining shares? And an upside to paying the distribution in shares would be the participant would be gone for plan purposes and therefore would not receive any dividend allocation and would save on plan costs?

[ESOP Guy]

If the person has stock in their account they would share in the dividends. I would add they should share in any price change while you are making the installment payments.

If you made the distribution in shares and the company did not buy 100% of the shares then the shareholder would be due dividends also.

Once again how can the company buy 100% of the shares paid from the plan? If they have the cash to do that you wouldn't be asking these questions. If they don't and they pay with a note, that note needs to be secured by something. As a practical matter very few outside firms are going to agree to secure that note for the company.

It sounds like you need to talk to an advisor who can look at all your facts and help you develop a plan to make payments. And more importantly plans for future years so you don't keep getting caught every year. Your questions just sound like it would help if you had someone who can help look at all the facts and develop a multi year plan for distributions.

[Guest sugar daddy]

Thank you ESOP guy, so irregardless of whether they pay in cash installments OR issue whole shares to the participant, dividends, as well as stock appreciation/depreciation, would still be due? I was thinking that if the plan distributed all the whole shares, they would be off the books for plan purposes and the repurchase of the stock would be between the former participant and the employer. So for example, if I had 100.5 share in the plan, they issue me 100 shares, pay me cash for the half of share and by all account I am no longer a participant. Then the Put Options come into play and the employer buys my stock in installments or possibly lump sum, if the cash is there.

I think ultimately it is easier if the plan pays in installments compared to shares, if they could get the participant to elect that option, would you agree?

The plan sponsor is a small bank.

[RLL]

Thank you ESOP guy, so irregardless of whether they pay in cash installments OR issue whole shares to the participant, dividends, as well as stock appreciation/depreciation, would still be due? I was thinking that if the plan distributed all the whole shares, they would be off the books for plan purposes and the repurchase of the stock would be between the former participant and the employer. So for example, if I had 100.5 share in the plan, they issue me 100 shares, pay me cash for the half of share and by all account I am no longer a participant. Then the Put Options come into play and the employer buys my stock in installments or possibly lump sum, if the cash is there.

I think ultimately it is easier if the plan pays in installments compared to shares, if they could get the participant to elect that option, would you agree?

The plan sponsor is a small bank.

If the plan sponsor is, indeed, "cash poor," why are dividends being paid?

Also, there may be regulatory restrictions on a bank's repurchasing its own shares.

This appears to be a complex situation. You should seek advice from legal counsel experienced in both ESOP matters and bank regulatory issues.

[ESOP Guy]

We are getting a little confused here. If the shares are distributed the next steps are between the company and the shareholder. But if the company doesn't buy the shares then dividends would be paid because the former participant is a shareholder. If the company can buy the shares shortly after they leave the plan, I guess why the question? That would seem to say they have enough money to buy the shares, regardless if in the plan or not.

Your example is correct. If the plan document allows shares to be paid then 100 shares would be distributed, and cash would be paid for the fractional shares. When you say the employer "buys my stock installments" you mean it buys 100% of the shares and gives the person a note, then obviously the person isn't a shareholder and isn't due dividends, and won't share in stock price changes. But that note has to be secured by something besides the company's word, and as a practical matter finding good security will be difficult.

Thank you ESOP guy, so irregardless of whether they pay in cash installments OR issue whole shares to the participant, dividends, as well as stock appreciation/depreciation, would still be due? I was thinking that if the plan distributed all the whole shares, they would be off the books for plan purposes and the repurchase of the stock would be between the former participant and the employer. So for example, if I had 100.5 share in the plan, they issue me 100 shares, pay me cash for the half of share and by all account I am no longer a participant. Then the Put Options come into play and the employer buys my stock in installments or possibly lump sum, if the cash is there.

I think ultimately it is easier if the plan pays in installments compared to shares, if they could get the participant to elect that option, would you agree?

The plan sponsor is a small bank.

[Guest sugar daddy]

They paid a dollar a share in dividends last year.

The document states that the administrator at the election of the Participant, shall direct the trustee to distribute any amount the participant is entitled to under the plan. Therefore, if the participant wants a lump sum, the sponsor has to pay them in a lump sum. If the sponsor doesn't have the cash and the participant does not opt for installments, is leveraging the esop the best option?