Profit sharing plan funded with 100% plan sponsor stock.

[Guest Thornton]

I have a propective client who wants to set up a regular profit sharing plan, not an ESOP, and contribute only plan sponsor stock. I’ve never done anything like this before. I’m not even sure our prototype would permit such an arrangement. Has anyone dealt with such an arrangement?

I can't find anything that explicitly prohibited this. However, I have questions.

1) Where does the stock come from? Treasury Stock If it is publicly traded, as this stock is, but thinly traded, how is it valued?

2) What about fiduciary concerns? It is unlikely that 100% stock would satisfy ERISA's fiduciary standards, especially 401(a).

3) Is there a better way to accomplish the same goal, without using an ESOP (stock purchase plan, etc).

4) Would it be better not to get involved as a TPA with an arrangement like this?

Thanks.

[ESOP Guy]

It can be done. I had a client do it once. There are a number of issues that you need to watch out for including many of the ones you mention. Do they have an ERISA attorney helping them set this up? There is at least one law firm I know of that seems to specialize in doing this for people and they help their clients avoid many of the pit falls of this kind of set up. They tend to call their product ESOT instead of ESOP.

To answer you questions:

1) It can be either Treasury stock or purchased stock. What market is the stock traded on? Some markets count as valid markets to use to value the stock and other aren't.

2) It seems like most of the fiduciary concerns are around value of the stock. It seems like there are ways around the concern of too much investments in one stock.

3) It isn't clear what the goal is? If it is to allow the employees to share in the growth of the company via share price growth then maybe a non-qualified plan, phantom stock or stock appreciation rights might do the trick.

4) I am not sure there are any special risks to the TPA here.

I would look out for Prohibited Transactions between the plan and the sponsor. The classic example for an ESOP that would seem relevant here would be if the stock was apprasied on 12/31/2012 and they now sell stock to or from the plan to/from sponsor the general understanding in the ESOP world is too much time has passed to use the 12/31/2012 price. You would have to get a new price or you have a PT.

[Kevin C]

You will also want to take a look at §1.401(a)(35)-1. If a goal is to keep the stock in the plan, that may be a problem if their stock is considered publicly traded under -1(f)(5).