Uses of ESOP loan proceeds.

[Guest JBDixon]

May an ESOP borrow money for any other purpose than the three uses (a) to acquire qualifying employer securities; (B) to repay the loan; or © to repay a prior exempt loan? For example, may an ESOP borrow money to invest in something other than qualifying employer securities?

[Dave Baker]

I would think an ESOP could borrow for any purpose authorized in the terms of the trust agreement if it wasn't backed up by a party in interest or otherwise a prohibited transaction, though the IRS regs have things to say about the use of a loan's proceeds if the loan wants to qualify as an "exempt loan" (which allows for guaranty by the employer, etc.).

[Guest Harry O]

Any plan, including ESOPs, can borrow money to buy investments. But the earnings on such investments are taxable as debt-financed income (see IRC 514). Congress has this little problem with tax-exempts leveraging off their tax-free status!