Diversification in stock only to current shareholders

[Trekker]

We have an S-Corp that sponsors an ESOP. The plan states that all distributions will be made in cash.

An Amendment is being considered to allow current shareholders to elect stock distributions when they become Qualified Participants for Diversification purposes.

The Amendment would also permit current shareholders to elect stock upon termination of employment.

Non-shareholders would not be permitted to elect stock.

Is this discriminatory, or is there some element to ESOP's sponsored by S-Corps that would allow this?

There are some shareholders who are Non-HCE, but the satisfaction of the 70% test of 410(b) is not guaranteed (effective availability issues).

Any thoughts?

[RLL]

Appears likely to result in prohibited discrimination.

[GMK]

Appears likely to result in prohibited discrimination.

Agreed.

Now, if you had an SSOP, stockholders stock ownership plan, then maybe. But I haven't seen that such an animal exists.