Authority on what type of assets plan sponsors use to fund repurchase obligation

[Tax Cowboy]

Group:

Over the years I've seen Plan Sponsors (for ESOP's) setting up

sinking funds to pay for future participant benefits.

Where do I find the citation/authority for types of assets

a plan sponsor can use to fund the repurchase obligation? Is there a specific DOL citation? Treas regulation?

I was thinking about this awhile back at a conference for civil/criminal tax matters and one speaker

referenced that there's no guidance even on investing in Crypto.  Other than a DOL letter/notice (?)

with a stern warning that retirement plan investments in 'crypto' may be a breach of fiduciary duties.  I don't have the date

readily available.  I may be conflating the two items as this didn't per se relate to ESOP's.  But,

could a ESOP trustee invest in crypto as their asset for the repurchase obligation?  Seems the IRS/DOL

leaves this in a grey area on purpose.

Thoughts and comments appreciated. 

[QDROphile]

Setting aside money for repurchase obligations or future contributions is a separate corporate financial matter and relates to corporate accounts. Because it is not an obligation related to the plan, or legally connected with the plan, ERISA and tax qualification rules do not apply, other than standard corporate tax rules having to do with accumulation and disposition of corporate assets. The ESOP’s interest is that of a corporate shareholder.  The corporation and its Board of Directors have corporate fiduciary duties to shareholders with respect to operation of the corporation and management of corporate assets. Also, if the corporation is majority or 100% owned by the ESOP, those circumstances are considered in determining the corporate fiduciary to the ESOP as shareholder. Investing in crypto currency may be a breach of corporate fiduciary duty to shareholders — I have no views to share on that point.

Your post implies at one point that it is an ESOP trustee that is funding or managing the sinking account for the sake of the ESOP. A sinking fund may be prudent for ESOP maintenance, but it is not a plan asset concern that would be the responsibility of a plan fiduciary. It is a corporate financing concern. The repurchase obligation is a corporate obligation.

[ESOP Guy]

Part of the problem with your question is you don't say where the sinking fund is.

Is the sinking fund on the company's books and a corporate asset(s) or is it inside the ESOP?

If it is on the corporate books and their balance sheet the Qualified Plan rules don't apply.  There can be corporate issues like is management running the business in a prudent manner.....  But the ESOP gets no say and the ESOP rules get no say.

If the sinking fund is in the ESOP than the rules for investing the funds is no different than any other qualified plan.  It has to be prudent, for the  exclusive benefit of the participants all those fiduciary obligations you have with a balance forward profit sharing plan or a DB pension plan.  

The one issue that is different is timing of payments.  A DB plan knows some of its benefits wont' be paid for decades so buying a 30 year bond with some of the assets can make sense.  If the ESOP knows it will need all the cash in the next 5 years is it prudent to be 100% stocks or crypto?  I would tend to think that is too much volatility for that time frame.  You go to ESOP conferences and you can get a pretty good debate over if an ESOP can stick to money market funds and maybe a little balanced fund since they are using some of the cash each year. 

I think you aren't find guidance because it doesn't exist.  The rules here are the same as any other balance forward qualified plan . 

I would add if they are trying to out grow their repurchase obligation using crypto that could be questioned if the investment is for the exclusive benefit of the participants or is it in part for the benefit of the company.  

In a balance forward environment I don't see how you put something that volatile in the plan.   Look at some years at how different the value at the prior 12/31 was compared to when they would be most likely be paying a person's cash balance out later in the year.  It isn't too bad in a year like 2023 where it went up by a fair amount but in a 2022 where much of the crypto crashed late in the year could be sticking the remaining people with a lot of losses.  

[QDROphile]

Good on ESOP Guy for understanding that the question might relate to holding assets other than employer securities in the plan for the purpose of the ESOP‘s option to repurchase securities, which is otherwise the sponsor‘s obligation. I would not describe this as a sinking fund, although it is effectively similar. It is a decision about what portion of plan assets to hold in other than employer securities, keeping in mind, the requirement that the plan must invest primarily in employer securities. Those assets would be accumulated by contributions over time, which means the ESOP is mature, probably not leveraged, and the employer is also opting not to feed the plan with stock contributions. I doubt that it means the employer is increasing the contribution rate with additional cash contributions.

[CuseFan]

ESOP Guy is spot on - not unexpected for an ESOP related question. Nice to have knowledgeable specialized contributors on this forum!

[Luke Bailey]

Here's a link to DOL guidance. More of a warning.

Compliance Assistance Release No. 2022-01 | U.S. Department of Labor (dol.gov)