Allocation of Expenses between ESOP and Employer

[Yesrod5]

After reviewing for the umpteenth time the letter to BenefitsLink regular poster, Kirk Maldonado, from Elliot I. Daniel dated March 2, 1987, and after reveiwing DOL Advisory Opinion 97-03A, Advisory Opinion 2001-01A, and other DOL guidance, it appears that generally speaking the costs of administering an ESOP (other than those costs relating to the settlor functions of designing, drafting, or terminating the plan) may be paid with plan assets (assuming the plan so provides).

Given the requirements of ERISA Section 407(d)(6) and IRC Section 4975(e)(7) that an ESOP be designed to invest primarily in company stock (and I know that the two definitions are somewhat different - but we have just one class of stock in the situation I'm looking into), it seems to me that the expenses of negotiating a stock purchase agreement with a major shareholder to permit the ESOP to acquire sufficient stock so that it was "invested primarily in company stock" would be an expense related to the implementation of the ESOP and therefore payable by the ESOP. Advisory Opinion 2001-01A seems to be broad enough to include this under the umbrella of expenses of the "implementation of the plan."

I would be most appreciative of any thoughts.

[Marcus R Piquet]

I don't have anything terribly helpful to say here other than the fact that I've never seen transactional fees paid out of plan assets nor heard anyone suggest that they could be. Given the amount of DOL scrutiny that ESOP stock acquisitions undergo already, I simply would not risk it.

[RLL]

The ESOP's primary source of cash is likely to be employer contributions, particularly if this is a new ESOP. So the employer could pay all those expenses directly and then later contribute less to the ESOP.

If this is not a new ESOP, the ESOP may have accumulated cash that theoretically could be used to pay those expenses. But, presumably, the employer will be making future cash contributions that could be reduced if the employer pays all those expenses.

Why take the risk of an ERISA violation by having the ESOP pay those expenses? Maybe I'm missing some unique facts that make a good case for wanting the ESOP to pay the expenses.

[Yesrod5]

Marcus and RLL,

Thank you for your insight. It's most helpful.