Partial ESOP Distributions

[Guest Melissa Bale]

My client wants to know if partial ESOP distributions are a common Plan option. Additionally, what are the administrative issues that should be considered prior to adding this option. Currently my client only permits lump sum distributions of the entire account balance.

[Kirk Maldonado]

I do a lot of ESOP work and I can't recall ever seeing a plan that provides for partial distributions other than those required by IRC Section 401(a)(28).

[RLL]

Partial distributions are very common in ESOPs of closely-held companies. These ESOPs often allow the establishment of a policy for making benefit distributions in installments, usually as a means of managing "repurchase obligation." ESOPs of publicly-traded companies usually provide for lump sum distributions (other than for "diversification" distributions under IRC Sec. 401(a)(28)(B).

I'm somewhat surprised that Mr. Maldonado says he has never seen such a provision.

Administration of an installment distribution policy is not very difficult, but there are added burdens which should be weighed against the benefits to be obtained.

[Guest]

I have personal working experience with leveraged ESOPs of three Fortune 50 employers. Each employer allows partial distributions.

One issue with partial distributions is that the employees will generally lose net unrealized appreciation tax treatment in the event of a partial withdrawal. This can be costly when you have a leveraged ESOP that purchased shares many years ago that now have a low basis.

[Kirk Maldonado]

My mistake. When I read "partial distribution," I thought the reference was to in-service distributions of some or all of the account balance that the participant could voluntarily elect to make unassociated with those required by Section 401(a)(28). Those provisions are fairly typical, for example, in Section 401(k) plans. I (obviously incorrectly) didn't interpret the language to refer to installment distributions after termination of employment. I think of those as being "total" (not partial) distributions, just spread over a period of time. It appears that my terminology is not consistent with that of the other readers of BenefitsLink.