May the second put period valuation be waived?

[Guest HIPAAdrome]

Employer terminated its ESOP and made stock distributions. Most participants exercised their put option during the first put period. Only a handful of people still hold stock and they do not intend to exercise the put option. Can the company save itself some money by not having a valuation done unless one of the employees still holding stock requests it (i.e., send out notices explaining the put option and giving the employee the right to request a valuation be done).

[RLL]

Yes. There must be be an updated valuation of the stock for purposes of the second put option, if a former participant, who is entitled to receive payment pursuant to a "fair valuation formula" under IRC Sec. 409(h)(1)(B), wishes to exercise the put option. However, the independent appraiser requirement of IRC Sec. 401(a)(28)© no longer applies after the ESOP has been terminated. Accordingly, the updated valuation may be determined by some other means in the event that any of the former participants requests notice of the updated value and/or wishes to exercise the second put option.

[Guest HIPAAdrome]

Hi RLL. Thanks for the input. A couple follow-up questions.

First follow-up: I guess my real question is do we have to do the valuation before the former participant decides to exercise the put option (so that we can tell the former participants what the exercise price will be)? Or can we send out a notice saying, in essence: "You have a right to have the company repurchase your shares. If you decide to exercise this right, the purchase price will be based on a valuation of the stock as of [date]. If you think you would like exercise the option, contact the plan administrator so that a valuation can be done."

Second follow up: Not having the indepedent appraiser requirement would help a lot. Do you have any authority for the idea that it is not required after the plan is terminated?

Thanks a lot for your input!!

[RLL]

Hi HIPAAdrome!

First-Who can complain if each of the former participants is given the opportunity to be advised of the updated value? Your client is taking a risk, however, that one individual may "waive" such right and then later find out (next year) that the value had been much higher, but had then dropped. Would it be safer to establish an estimate of value to communicate? Maybe.

Second-how can Sec. 401(a)(28)© apply to an ESOP that no longer exists? There is no longer a plan to disqualify. Presumably, the ESOP complied with the independent appraisal requirement while it was operating. There are no longer any plan activities to which the requirement can still apply. I have no IRS or other "authority" for this position, only that I think I'm right (I usually am!).