Participant pass-through voting rights can change after loan is paid o

[Guest LDH1]

Plan document provides for total pass-through as required under Section 133. However, loan has been repaid, so can voting rights only be provided for significant corporate events as the plan provides if there is not intended to be a loan pursuant to Section 133.

[RLL]

Very good question, LDH1.

The 1977 ESOP definitional regulations (Sec. 54.5975-11) have a concept called "non-terminable rights" which will continue to apply even if the plan ceases to be an ESOP. It would seem that the voting rights required under IRC Sec. 133 should be subject to a similar requirement....that they must continue to apply even after the Sec. 133 loan has been repaid.

But the IRS has never included such a requirement in regs under Secs. 133, 409(e), or 4975(e)(7).

In addition, the voting rights required under Sec. 133 were merely a condition for the lender to receive the partial interest exclusion for certain ESOP loans. There was no Sec. 401(a) or 4975(e)(7) requirement beyond what Sec. 409(e) required.

So long as there is no longer any possibility for the lender to retroactively lose the 50% interest exclusion (if the statute of limitations has passed on the lender's tax return for the final year of the loan), there is no sanction for amending the ESOP to remove the full voting rights required by Sec. 133.