Timing of Distributions

[Guest tm3333]

Is there any IRS guidance on whether the timing of distributions from an ESOP may be limited to twice yearly following the Plan's receipt of the valuation? What potential cutback issues could result under 411(d)(6)?

[Kevin C]

There are some ESOP exceptions under 411(d)(6) for changes in distribution options. See 1.411(d)-4 Q&A 2 (d).

[Marcus R Piquet]

tm3333 - It would be great if you could give us some more details. What exactly is the current benefit, and what is the proposed change to that benefit?

Kevin points out that §411(d)(6)© provides an exception for ESOPs that allows it to modify distribution options in a nondiscriminatory manner. At that point I would ask if this is a blanket exception that applies to all features of the distribution options (timing, form, manner, etc).

Regs 1.411(d)-4 Q&A-2(d) expand the discussion to say that the following explicit modifications are allowed:

1) lump-sum or installment options with respect to unmarketable employer securities

2) distributing cash instead of stock when the company becomes substantially employee-owned or is an S corporation

3) modifications because the employer securities become readily tradable

4) modifications because the employer securities cease to become readily tradable

5) modifications because there is a sale of substantially all the stock of the employer; or

6) modifications because there is a sale of substantially all of the assets of the employer's trade or business

It has been my understanding that the distribution policy may clearly be revised to change between installment distributions or lump-sum (i.e., the "manner").

Also, if the company is an S corporation or if the corporate "charter or bylaws restrict the ownership of substantially all outstanding employer securities to employees or to a trust described in section 401(a)" (§409(h)(2)(B)(ii)(I)) (i.e., the "form").

However, what about timing? For example, if the Plan accelerates the timing of non-retirement distributions to the year after the year of termination, can it later go back to the fifth year following? I've received conflicting answers from different ESOP attorneys. I see no support for deferring the timing. One ESOP attorney told me that you can do this if the plan maintains the fifth-year following provision, but you have a separate policy that temporarily allows for the first-year following provision. I think they're relying on the statement in 1.411(d)-4 Q&A-1© that states that there is no protected benefit if the benefit is not "provided under the terms of a plan." In other words, if it's part of the separate distribution policy and not part of the plan document, there is no protected benefit. I find this logic troubling, however, since many ESOP attorneys believe that the distribution policy is effectively part of the plan document.

We are extremely careful about advising clients to limit any acceleration of benefits in a distribution policy. If there is to be an acceleration, we generally suggest that they limit it to small balances (e.g., if the balance is less than $10K distributions commence the year following the year of termination. Otherwise it's the fifth year following the year of termination). Then, so long as we don't reduce that threshold in the future I don't think we have a cutback.

I'd love to hear anyone else's input on the timing of benefits!

Marcus

[ESOP Guy]

I am a little unsure what your goal is. If you have one stock price for the whole year for the payments what difference does it make if you pay twice or five times a year? Is the problem you want to stop writing checks so many times a year or is your problem cash flow?

I think it might help if you clarify what is causing your to reduce the number of times you make payments in a year.