Do 409(e) voting rules apply to stock owned under a 401(k) portion of

[Guest kredlin]

A C-corp has an ESOP plan that also includes a qualified cash or deferred arrangement under 401(k). Employees own stock of the employer in both the ESOP portion and 401(k) portion of the Plan. Do the voting requirements of Sec. 409(e) apply to the shares of stock that employees own under the 401(k) portion of the Plan?

[RLL]

If the 401(k) portion of the plan is an ESOP under IRC Section 4975(e)(7) (and is not a non-ESOP part of an ESOP), it is subject to the requirements of IRC Section 409(e).

[Guest kredlin]

In this case, it is a non-ESOP part of an ESOP. Therefore, is it exempt from the voting requirements?

[RLL]

If the 401(k) portion is a profit sharing plan, it is not subject to IRC Section 409(e). If the 401(k) portion is a non-ESOP stock bonus plan and the employer has stock that is publicly-traded, it is not subject to section 409(e).

If the 401(k) portion is an ESOP or a non-ESOP stock bonus plan and the employer does not have stock that is publicly-traded and more than 10% of the plan assets are securities of the employer, it IS subject to the Section 409(e) voting rights requirements by reason of Section 401(a)(22).

Why would you want to deny employees voting rights on shares of company stock purchased with their own 401(k) contributions....especially when they have certain voting rights on stock in the non-401(k) part of the ESOP?

[IRC401]

I realize that ESOP and other portions of a plan may be tested separately for purposes of 410(B), but I have never been comfortable with the notion that a plan is part ESOP and part non-ESOP. Does the client have a determination letter stating that the plan is not entirely an ESOP.

If the securities are publicly traded, it seems to me that you would want to pass through voting rights. If the securities are not publicly traded (and are being purchased with 401(k) contributions, have you checked with a securities attorney whether you are in compliance with SEC rules?

[RLL]

IRC401 ---

Section 54.4975-11(a)(5) of the 1977 IRS regulations under IRC Section 4975(e)(7), defining "employee stock ownership plan," provides as follows:

"(5) Addition to other plan. An ESOP may form a portion of a plan the balance of which includes a qualified pension, profit-sharing, or stock bonus plan which is not an ESOP. A reference to an ESOP includes an ESOP that forms a portion of another plan."

This makes it very clear that an ESOP may be a portion of a combination plan that includes a non-ESOP portion.

[Kirk Maldonado]

I agree with RLL that you can have both types of plans in a single document. However, you need to scrutinize the plan document carefully to make sure that it makes this point abundantly clear. (Many plans do not.)

[RLL]

Kirk ---

It's more than just a plan document issue. Multiple plans can be administered together and can be combined under one trust, one SPD can be used (if desired), one 5500 (and audit) can cover the combined plans, etc.