ESOP Loan Refinancing

[RLL]

The trustees must determine that the loan extension is primarily for the benefit of participants under ERISA Section 408(B)(3) and solely in the interest of participants under ERISA Section 404(a)(1). In addition, if the primary benefit test under IRC Section 4975(d)(3) is not met, the IRS may impose an excise tax.

How does the extension benefit the ESOP participants? Or is the extension primarily for the benefit of the company and shareholders other than the ESOP? What percentage of the company does the ESOP own? It is clear that the extension will result in slower release of shares for allocation to participants' accounts. Is there a problem in amortizing the loan (under its current terms) by reason of the limits under IRC Sections 404(a) and 415? Is the reason for the extension to limit the employer's obligation to make ESOP contributions?

For your information, the IRS has an official position that it will not issue private letter rulings regarding compliance with the primary benefit rule of IRC Section 4975(d)(3) in connection with the refinancing and/or extension of an ESOP loan. In addition, the DOL has recently expressed concerns about the actions of fiduciaries in approving extensions of ESOP loans. The two agencies have been discussing how they can reconcile their respective positions under IRC Section 4975(d)(3) and ERISA Section 408(B)(3).

[This message has been edited by RLL (edited 07-15-99).]

[Guest Lori Basilico]

The trustees of a leveraged ESOP want to restructure the ESOP loan (between the Company and the ESOP) so that repayments will be completed over a 45 year period. The original term of the loan was 20 years (approximately 10 years remaining on the original loan), and the trustees wish to extend the term for another 45 years. Has anyone refinanced an ESOP loan for this length of time? What isues should the trustees be concerned about?

[Guest Sherry Porter]

For some additional guidance, see the following PLRs: 9610028; 9652024; 9649050; 9530023; 9501042; 9443049; and 9437039. Most of these deal with situations of corporate downsizing or financial problems. However, they will certainly provide you with some insight as to how the Service views refinancings of ESOP loans.

[RLL]

The 1994-96 PLRs are no longer a good source for determining the current position of the IRS. For several years, the IRS has been reconsidering its position on the "primary benefit" requirement of IRC Section 4975(d)(3) in connection with the extension of ESOP loans and has not given rulings on this issue. In addition, fiduciaries should be more concerned about the position of the DOL on the "primary benefit" requirement of ERISA Section 408(B)(3). Apparently, the DOL is taking a more stringent position on this issue than the IRS.