Employer Stock

[cs771]

Private company sponsoring a participant-directed 401(k) plan with employer match and profit sharing wants to offer company stock as an investment alternative to all participants. Participants will be permitted to purchase employer stock with its current matching and profit sharing dollars in the plan. Company will need an annual valuation, document amended, etc. Any issues with doing this with private companies...outside the risk of litigation related to stock drop, etc? Administratively, how does this work? For example, Participant A wants to move $20,000 of profit sharing dollars from current mutual fund investment to employer stock. The $20,000 is distributed to the company and the participant now has X number of shares? I could see this resulting in cash flow concerns if years down the road if a large number of participants with employer stock terminated employment and were looking to cash out. What type of restriction on distribution is typically seen?

[cs771]

As an aside, I have never seen this outside of an ESOP and do not know how this could work. Thank you for any insights you provide

[MoJo]

Who is the trustee? They will have to be able to 1) hold the stock; and, 2) effectuate the transactions. I've been involved in situations like this before, but with an "institutional" trustee (usually bundled arrangements) that have the capability to handle this.

Who are the plan fiduciaries? First, they should have their heads examined. While it is a settlor function to decide to add company stock to a plan, it is a fiduciary function to determine whether to hold it, and if and when to sell it.

[rcline46]

look up KSOP and review problems and operational items. Look up ENRON and see what can happen. Review all rules on blackout periods which will happen frequently in this type of plan. Speak with your software provider to see if you system can handle it.

[ESOP Guy]

I have seen it done in a Profit Sharing plan. I have never seen it done in a 401(k) plan. You might want to check with an attorney that knows security law. The few times I have had conversations with attorneys regarding using 401(k) deferrals to buy stock in an ESOP there has always been concerns regarding securities law. You are in effect making a market for the stock so you need to make sure you don't accidently run afoul of those laws. You don't want to find yourself in a position of having had to put out a prospectus. The key in those attorney's mind was there is a big difference using employer money contributed on behalf of someone and money coming from their pay check. I don't know the detials but I have had the point made to me several times over about a 10 year span that you need to watch out for this.

There are also possible PT issues. There is a law firm out there that advertises helping one set up profit sharing plans that hold closely held stock.

Lastly, remember only ESOPs get the nice benefit of not owing taxes on the pass through income of an S corp. So if the company is an S corp you are going to want an ESOP.

[MWeddell]

A rule of thumb is that if participants have a decision to move dollars into an employer stock fund, then the stock must be registered (i.e. publicly-traded). Given that your situation violates the rule of thumb, make sure to contact a knowledgable securities attorney to see if it is permitted.

[cs771]

As expected, lots of things to think about. Thank you all for your responses.