Sale of Employer Securities From Plan

[mming]

A profit sharing plan allows for participant-directed investments only for rollover accounts, all other amounts are pooled.  The only participants with ROs are a majority owner and an NHCE, and they have chosen to invest their RO balances in employer securities (company is privately held), which the plan allows (FT William doc).  They now would like to sell their employer securities to a financial advisor who assists with the appraisal of the stock and were wondering if this could somehow be legally accomplished without it being considered a PT.  If these participants elect to change their RO investments to cash and get out of the stock, could the plan then sell it to the FA?  When the plan was first set up (but before this stock sale was considered) FT William indicated that transactions involving the stock would generally not be considered PTs because it is not publicly traded stock and, therefore, not qualifying employer securities.  It seems that 407(d)(5) can be interpreted that way but I would like to be sure.  I can't say I have ever come across such a situation and would appreciate any guidance offered.  

 

 

 

 

 

 

[QDROphile]

Nonpublic stock of the employer is about the MOST sensitive asset for purposes of prohibited transactions.  "Qualifying employer securities" actually enjoy some exemptions from some PT rules.

What does this mean:  "If these participants elect to change their RO investments to cash and get out of the stock, could the plan then sell it to the FA?"  How does stock "change" to cash without a sale or exchange?  But  to answer your question, one type of PT is a sale or exchange of property between a plan and a party in interest.  A person who provides services to the plan, such as valuing the stock, is a party in interest.

[Peter Gulia]

Beyond a buyer thinking about the prohibited transactions and the rights and remedies a nonexempt prohibited transaction affords the seller plan, the seller plan, its fiduciaries, and the directing participant might consider Federal and State securities law to consider what consequences could result from an offer or sale, if it is not registered and not exempt from registration.

 

[Luke Bailey]

If the financial advisor is a service provider to the plan, which it sounds like he or she is, regardless of whether the plan has paid an portion of the appraisal fees, then the financial advisor is a disqualified person. See IRC sec. 4975(e)(2)(B). Therefore, public or private, you can only avoid a PT if the stock is "qualifying employer securities." See IRC sec. 4975(c)(1)(A) and the exemption in IRC sec. 4975(d)(13). Sounds like the stock here may be qualifying employer securities, but you need to make sure of that. There are, of course, other potential issues here with respect to how the Plan was set up.

[mming]

Thank you all.  The trustees are now asking about whether the employer (who is a fiduciary, a disqualified person) can buy back it's own stock from these self-directed RO accounts.  Luke Bailey, I'll check to see if they have the appropriate voting power and dividend rights described in 409(l) to be considered qualifying employer securities.  Reading through 4975(d), I was hoping to find an applicable exemption and the closest one seems to be (d)(7), though I wasn't able to find specific info regarding 'the exercise of a privilege' and the 'regulations of the Secretary' - they sound like very loaded terms.  The stock is annually appraised by an independent third party.  As for the setup, the employer stock was an investment choice offered, among several others, from which participants could choose from pursuant to the terms of the plan.  Since it seems that it's not too uncommon for a plan to not only offer employer securities as an investment choice, but to also change (e.g., replace) the available choices offered from time to time, one would expect some kind of reasonable method to exist that would allow the plan to purge the stock (provided the participants holding the stock voluntarily agree to do so).  Suppose the employer wants to do this because they fear the stock price will drop and wants to avoid the plan being affected? Is having the plan sell the stock to a third party the only way this could happen?

[QDROphile]

Private employer securities in the account of an owner of the plan sponsor very often involves some dirt along the way somewhere, which is why extrication can be difficult.  One path to resolution is to distribute the securities, being very careful about valuation.  But that requires a distribution event.

[Luke Bailey]

If the stock is qualifying employer securities, 4975(d)(13) and the purchase is at FMV, the employer should be able to buy, but note that the 4975(d)(13) and the parallel ERISA exemption should avoid this being an automatic PT. Need to also meet fiduciary requirements and not be otherwise an act of self-dealing.

[Peter Gulia]

And whatever exemption one might rely on to exempt a prohibited transaction under the Employee Retirement Income Security Act of 1974 or the Internal Revenue Code of 1986 might not be enough to meet conditions for an exemption from registering an offer of securities.

 

[ESOP Guy]

And you have to worry about timing of the same with an annual appraisal.  This comes up with ESOPs all the time.  You get the 12/31/2017 appraisal in mid May.  That mean 4.5 months of business has happened so is the copmany's value still the same as if was on 12/31/2017? 

That is why in ESOPs  most people tell you to distribute the shares and have the sponsor buy them off of the person at that point.  It solves a large number of problems. 

I have only worked with a very small number of PSPs with employer stock so I am not 100% sure the rules on in kind payments and sales to the sponsor work the same way but that is the easiest way to get the shares from the plan to the sponsor. 

[mming]

No doubt this is a tricky area, but it would seem that 408(e) would provide the exemption as long as you meet the adequate consideration requirement and no commissions are paid, or I am just missing a cross-reference?