Company stock in MP part of ESOP

[Richard Anderson]

I'm new to ESOPs.

A client recently paid off ESOP loan, and now has a new document combining ESOP and money purchase plan.

At the ESOP session of the 1994 ASPA annual conference R. Grant Williams has in his written material: "An ESOP that includes a money pruchase plan in conjunction with a stock bonus plan may have a combined deductible limit of 25% of payroll. (Two separate plans are necessary for a 25% limit if no credit carry overs are used.)"

Does this mean that a money purchase - ESOP combination is considered 2 plans? Two 5500s?

Also, can the money purchase part purchase employer stock from the ESOP part of the plan?

[RLL]

An ESOP under IRC Sec. 4975(e)(7) and ERISA Sec. 407(d)(6) that includes both a stock bonus plan and a money purchase pension plan is two plans under IRC Sec. 401(a), but the IRS permits the filing of one Form 5500 for the combined ESOP (also, one Form 5300, together with Form 5309, is filed as an Application for Determination). For purposes of ERISA Title I, the ESOP is treated as one plan.

The money purchase portion of the ESOP is generally subject to the 401(a0 requirements for a pension plan, but there are special ESOP exceptions that may override the pension rules (such as the ESOP exemption from the J&S annuity requirement).

Why would the money purchase portion want to purchase employer stock from the stock bonus portion? There is no "ESOP part".....the combination of the two portions is an "ESOP."

[Richard Anderson]

The ESOP does not distribute employer stock. Shortly, there are going to be some large distributions to employees that have a large amount of employer stock in their accounts. The ESOP portion of the plan does not have enough investments other than employer stock to make the distributions in cash, but the money purchase portion does. Can the money purchase plan and ESOP exchange assets (cash for stock)? Is this treated as stock bonus plan, and the stock from the distribution then can be reallocated to the money purchase accounts of active employees.

This plan requires rebalancing of assets at the end of each plan year. After rebalancing each participant will have the same ratio of employer stock and other investments. Does this rebalancing also extend to the money purchase source? If this is one plan, I think it would. If it's considered two plans, then I don't know.

[This message has been edited by Richard Anderson (edited 09-24-1999).]

[Dowist]

The combined MPP/stock bonus ESOP would be considered one plan for 5500 purposes, and there is no requirement that all of the stock assets be allocated to the stock bonus part of the plan - in fact I could argue that the when the stock went in each year that it would have to be split between the MPP and stock bonus accounts (in other words the MPP Plan is part of the ESOP and would be equally subject to the ESOP rules requiring that assets be primarily invested in stock.)

So far as using cash from the MPP side of the plan to pay for stock of departing pts, I've seen it done, but I would be uncomfortable with it - especially if the plan has not done it before and is doing it primarily to pay off these big accounts.

What would be happening is that the ongoing participants would be purchasing the stock of the departing participants, and the percentage of th ongoing participants' accounts invested in stock would increase - the result would be that they would be moved to riskier investments because of the decision to make payments this way.

What would happen if the stock tanked after all those pts with big accounts were paid with the ongoing pts cash? You could - IMHO - have a lawsuit, a big mess, unhappy pts, DOL interest, and scared fiduciaries - I would not want to be the fiduciary who directed that approach in this situation.

Now you have some arguments that all this ok - an ESOP is supposed to invest in co. stock - BUT I would not want to be an ESOP fiduciary when a company tanks. If it's going to happen anyway, the fiduciary better have his fiduciary insurance up-to-date.

[RLL]

Under Title I of ERISA, an ESOP which is a combination of a stock bonus plan and a money purchase plan is still one plan. There can be an intra-plan transfer of stock/cash to pay benefit distributions in cash. The fact that the cash is under the MPP portion makes no difference....the entire plan is an ESOP. The issues would be the same if the ESOP was a stock bonus plan alone.

Dowist correctly points out that a distribution of cash, rather than stock, is a decision by a fiduciary to "purchase" stock for the remaining participants. However, this is not a major issue for an ESOP....which is required to be designed to invest primarily in employer stock. ESOPs often use existing cash assets to buy employer stock....that's the purpose of the ESOP under ERISA. If there's a real concern that employer stock is a "riskier" investment, why was the ESOP established as such in the first place? The fact that the ESOP includes a MPP does not change the analysis.

Of course, an ESOP fiduciary should not use existing cash to purchase more employer stock (or distribute cash in lieu of employer stock) at a time when it is expected that the value of the stock will decline. The same is true for any other investment by any type of plan.

But it is not a major problem for an ESOP to buy more employer stock for participants if the fiduciary acts prudently in making its investment decision and pays no more than fair market value. That's the reason there is an ESOP....to provide stock for participants.