Dormant ESOP with a vesting schedule

[kwalified]

A small plan that hasn't been funded since 2000, is it a requirement to fully vest participants since the sponsor has no intention of ever funding the plan? The plan was established in the 90's to buy out ownership of a partner.

[GMK]

Assuming by "funded" you mean "contributed to," you just keep vesting participants according to the vesting schedule in the Plan Document.

Regarding contributions, Q-32 in this list:

http://www.sfeglaw.com/page.php/id/176

says that while annual contributions are not required (except as needed to pay off any ESOP loan debt), the IRS requires "recurring" contributions to maintain the qualified status of a tax qualified retirement plan, so that could become an issue.

Others say "substantial and recurring contributions" and point to qualification under 401(a).

[Lou S.]

Sounds like a partial termination upon the complete discontinuance of employer contributions.

Just curious how are they buying back the stock when vested participants leave and take a distribution? Granted I don't really work on ESOPs but generally the ones I've seen the company often needs to make contributions just to have cash in the Plan to pay on going distributions.

[GMK]

^The benefit can be distributed in shares of stock. The participant gets a "put option" giving the participant the choice to, in effect, require the company to buy the distributed shares. The Plan Doc may specify that the company automatically and immediately buys any shares that the ESOP distributes, for example, if the company is an S corp owned by the ESOP.

These circumstances mean that the company must have some cash on hand to buy the distributed shares. The ESOP doesn't necessarily have to hold the cash.