5% ownership rule

[Marshall Vass]

As a participant in an ESOP, I have over 12% ownership in company stock in my account. I am 72 years old. Am I considered an owner for the purpose of RMD under the 5% RMD?

[ESOP Guy]

The stock in the ESOP account does NOT count for ownership purposes for most rules including the RMD rules.  Legally speaking the trust owns the stock not you.  You are a beneficiary of the trust.   So that stock does NOT count to determine if you are a 5% owner or not for the RMD rules. 

That was the long answer.

The short answer is:  no, as long as you don't own any stock outside of the ESOP. 

[Marshall Vass]

The plan states "must generally begin distributing benefits to an ESOP PARTICIPANT who is a 5% owner". You can't be a participant if you own stock outside of the ESOP, so how can there ever be a 5% owner for the purpose of this rule?

[Marshall Vass]

Why is the 5% rule stated in every ESOP plan if there is no way for a participant to ever become a 5% owner?

[BG5150]

ESOP's don't own 100% of a company's stock, usually.  You can have other stock owners outside the plan.

[Marshall Vass]

But an owner outside the plan can’t be a participant.

 

[JackS]

1 hour ago, Marshall Vass said:

But an owner outside the plan can’t be a participant.

That may be a rule in the particular ESOP you are working on but it is not a universal rule.

[ESOP Guy]

1 hour ago, Marshall Vass said:

But an owner outside the plan can’t be a participant.

 

The other people are correct that isn't a universal rule.  There a plenty of ESOPs with outside owners who are participants. 

 

[ESOP Guy]

3 hours ago, Marshall Vass said:

The plan states "must generally begin distributing benefits to an ESOP PARTICIPANT who is a 5% owner". You can't be a participant if you own stock outside of the ESOP, so how can there ever be a 5% owner for the purpose of this rule?

It sounds like in this plan there can't be a 5% owner for RMD purposes.  That isn't uncommon with ESOPs where the ESOP owns 100% of the shares of a company.  

[david rigby]

2 hours ago, Marshall Vass said:

But an owner outside the plan can’t be a participant.

I think "outside the plan" is intended as reference to stock, not as reference to the individual. 

[ESOP Guy]

16 hours ago, Marshall Vass said:

But an owner outside the plan can’t be a participant.

 

I can think of some possible fact patterns that would account for a rule like that being in an SPD.   But without having knowledge of the facts I would be just guessing.   It is safe to say however the shares inside the ESOP don't count for 5% ownership.  

[BG5150]

On 12/26/2018 at 4:23 PM, Marshall Vass said:

But an owner outside the plan can’t be a participant.

 

I meant someone who owns stock in the company where that stock is not held by the plan.

For example, I own 80% shares of the BG Company, and 10 others own 2%.  We start an ESOP.  We issue NEW shares to the ESOP.  Whereas the original owners' share % drops with the issue of new shares, I will be an HCE with respect to the 5% owner rule for quite some time, I hope.