What to do when the value of an employer security is $0.00?

[ERISA Professor]

This question is about an employee stock ownership plan. The plans sponsor (which also is and was the employer of the plans participants) elected, and intends to maintain, Federal income tax treatment as an S corporation. The employer securities are not publicly traded.

The plan provides: Whenever the Sponsor has a Subchapter S election in effect, the portion of a Retirement Distribution that is attributable to Employer Securities shall be paid in cash or, in the Administrators Discretion, shall be delivered in the Corporations Shares but subject to the Distributees obligation immediately to sell the Shares to the Corporation at the Fair Market Value set as of the most recent Valuation Date that precedes the Distribution. (The provision seems consistent with Internal Revenue Code § 409(h), and the plan has a recent IRS determination letter.)

The plans trustee annually has used an independent appraiser, and always has used the valuation reports per-share amount as the value for the plans transactions.

The appraiser set the value as of December 31, 2014 at $0.00. (The corporations debt was much more than any valuation of the corporations assets.) The plans trustee believes the year-end value for 2015 also will be zero.

For a set of upcoming distributions to participants who severed from employment in 2014 and earlier, the plans administrator is thinking of informing the participants that a notional delivery of the shares and the sale of them for $0.00 per share is treated as having happened simultaneously.

Can there really be a sale that extinguishes a property right in exchange for an imaginary payment of $0.00?

If, instead, the plans administrator decides that the distribution shall be paid in cash, can there really be a payment if the amount paid is $0.00?

Should the plans fiduciaries be worried that a participant now surrenders property, gets nothing for it, and forever loses the opportunity for the property to increase in value?

[ESOP Guy]

To play devils advocate:

If the plan doesn't pay the distributions per the terms of the plan that is failing to follow the plan document which is a disqualifying defect of the plan.

I would maybe ask the plan's ERISA attorney what they think or maybe pay everyone one cent. I am spit balling on the one cent thing. But if the stock is worth nothing and everyone is comfortable with that idea I am having a hard time coming up with a reason to not make the "payment" per the terms of the plan document.

I think this issue is beyond a free discussion board even one made up of industry people.

[GMK]

Presumably the participants who severed from employment in 2014 and earlier are required to take their distributions, perhaps because of their age. If instead they had the option to defer the distribution, then they could wait until the business recovers before they take their distribution, rather than requesting a distribution now that they know will give them zero dollars.

Maybe it would be possible to amend the plan to allow those folks to defer their distribution indefinitely, subject to RMD's.

Participants who voluntarily request a distribution when the share price is zero will not have a future claim against the plan's people, because those participants knew they would get nothing when they asked for it.

If the Plan Document requires distributions to be made and requires the Corporation to buy distributed shares immediately, then that's what the Plan has to do. Persons who are forced to take a distribution (because of age or whatever) might sue if the business later recovers, even though the plan made the distributions exactly as the plan document requires. Whether they could win in court is beyond my knowledge or experience to predict, but it would not be a surprise if somebody filed a claim. Regardless of possible future law suits, the Plan must do what the Plan Document specifies. As ESOP Guy says, ask the plan's ERISA attorney how to proceed.

[mphs77]

Seems to me that this situation is a lawsuit (or several) waiting to happen.

John Doe has a balance (after the most recent valuation date) of $0, because after all even a lot of shares times $0 per share yields $0. And as $0 is less than $5,000......the Plan could say that John has been paid his distribution of $0 and immediately re-allocate his now repurchased shares to the remaining participants.

Do this enough times and only the owners may be left with any shares. Want to bet the price becomes something other than $0 then?

[ERISA Professor]

Thank you all for the interesting ideas.