Coordination of 401(a)(14) and 409(o)

[Guest Pennysaver]

How exactly is compliance with the distribution timing rules under IRC 401(a)(14) and 409(o) coordinated? Does one have precedence over the other? Or must you closely examine which potential deadline for each individual participant in an ESOP to ensure the rules are complied with? Is that even possible?

Thanks, and citations to any official guidance are very much appreciated!

[Marcus R Piquet]

Dear Pennysaver,

Whichever provisions results in the earliest distribution wins.

Generally §409(o) wins out, but if you have a participant terminate between the ages of 60 and 65 §401(a)(14) often wins.

To further complicate matters, remember that §409(o) applies only to shares acquired post-1986, so for the older ESOP's you have to check the plan document to see if §409(o) applies to all shares or only the post-1986.

Lots of fun for TPAs.

Best regards,

Marcus

[Guest Pennysaver]

Generally §409(o) wins out, but if you have a participant terminate between the ages of 60 and 65 §401(a)(14) often wins.

Thanks very much, Marcus. And now a follow up question:

Where IRC 401(a)(14) wins out, how is it met when it is not possible to have the appraisal of the qualifying employer securities completed by the 60-day period at the beginning of the plan year? Is the prior year's valuation used, with an adjustment made on the next annual payment based on the actual valuation?

[Marcus R Piquet]

Pennysaver,

We typically do NOT take advantage of the 60-day window, rather we accelerate the distribution offer to at least 30 days BEFORE the end of the plan year so that we don't have to revalue the account.

Marcus

[GMK]

we accelerate the distribution offer to at least 30 days BEFORE the end of the plan year so that we don't have to revalue the account.

I'd be a little concerned about this approach (assuming an annual valuation), since the beginning of year share value may not reflect the October - November fair market value.

There was a big discussion of this on these boards a while back, but I can't find it right now. One approach is to use the year-old valuation for the timely distribution and then do a second distribution when the applicable valuation is available. If the stock value is likely to go down, you have to be careful to not over-pay with the first distribution.

As I recall, some plans give out the distribution request form and notices early to meet the deadline, but do not make the distribution until the valuation is completed. Participants are advised that they have until the valuation is completed to change their distribution requests, based their real account balance.

[Marcus R Piquet]

GMK,I'm a little puzzled. It is exceedingly common (in fact the norm) for non-publiclytraded ESOPs to make distributions in the third or fourth quarter of the planyear, and those distributions are always valued at the most recent valuationdate (i.e., the previous plan yearend) no matter how much the stock value mayhave changed during the plan year. See IRC Regs §54.4975-11(d)(5). This wouldapply to any distribution, not just one that was offered under thecircumstances that Pennysaver brought up.

[GMK]

It is exceedingly common (in fact the norm) for non-publiclytraded ESOPs to make distributions in the third or fourth quarter of the planyear,

Thank you for your comments.

I didn't realize that is the norm (like many things I don't know). We still try to get distributions out as early as practicable in the second quarter.

And thank you for reminding me of the cite. The annual valuation is clearly acceptable for later-in-the-year distributions.

[Marcus R Piquet]

GMK,

I whole-heartedly agree that the sooner distributions can be paid the better. Diversification distributions need to be paid out in Q2 to be timely, so our goal is to help all of our calendar year-end clients complete the annual recordkeeping by April 30. That said, it's tough to make that kind of schedule when you have to wait for the appraisal and the plan audit.

Best regards,

Marcus