ESOP conversions

[EGB]

I have a client that maintains a leveraged ESOP. February 2000, the ESOP loaa will be completely repaid. At that point, the client wants to convert the ESOP to either a profit sharing plan or a money purchase plan. My understanding is that this conversion can happen without fully vesting all participants (and, obviously, no cut-backs under 411(d)(6) can occur). However, I am not sure what happens with the stock that has been allocated to participants' accounts. Is it possible to (or required), upon the conversion, replace the stock in each participant's account with cash (assuming an accurate valuation)? If they can't replace the stock with cash (which may not be financially feasible anyway), then

I assume the stock remains in the accounts and no further stock is allocated or contributed by the client. What are our options?

Another issue - an ESOP has to be designed to invest "primarily in employer securities". What minimum percentage of trust assets would need to be invested in employer securities to meet this rule?

[RLL]

Beth---you have identified the biggest issue as that of repurchasing the employer stock from the ESOP. It not only takes a buyer with cash, it would require that an ESOP fiduciary approve the ESOP's sale of stock. If the sale is to the company that sponsors the ESOP (or to a related party), the fiduciary should be independent of the company and its shareholders. The purchase price must be no less than fair market value, but the fiduciary may demand a "premium" above fair market value as a condition of approving the sale by the ESOP.

If the plan is converted into a money purchase plan, it cannot own employer stock in excess of 10% of plan assets, per ERISA Sec. 407(a). A profit sharing plan may continue to hold up to 100% of its assets in employer stock, so long as it is designated as an eligible individual account plan under ERISA Sec. 407(B).

An ESOP is generally considered to be invested "primarily" in employer stock if such stock constitutes more than 50% of total plan assets. There is no requirement that employer stock continue to be contributed to the ESOP or that additional stock be allocated to participants' accounts. Unless the ESOP has available cash, it is unable to acquire additional shares on its own.

If there is no means for repurchasing the ESOP's stock, you might consider "freezing" the ESOP as a separate account under an ongoing profit sharing plan.

Also, you should consider how to address (on an ongoing basis) certain ESOP requirements under the IRC, such as diversification under Sec. 401(a)(28)(B), voting rights under Sec. 409(e) and the right to receive distributions in employer stock under Sec. 409(h)(1)(A).

Beth----if you're doing a lot of ESOP work for your clients, you should join the National Center for Employee Ownership (at www.nceo.org) and The ESOP Association (at www.esopassociation.org). Both organizations provide good info for professionals, have good technical meetings, etc.

[This message has been edited by RLL (edited 10-20-1999).]