Any Problems with Plan Sponsor owned by Participants in ESOP?

[Dougsbpc]

Have a 401(k) plan that has been co-sponsored by two related entities for many years (company A and company B). Each entity has about 20 - 30 employees.

Effective 1/1/2026, one of the entities will also sponsor an ESOP. No controlled group or affiliated service group issues. They will be slowly funding the ESOP with stock over time but eventually the employees of company A will own 100% of company A. Does this create any any problems with company A continuing to co-sponsor a 401(k) plan along with company B?

Thanks.

[QDROphile]

You assert that the two employers are unrelated with respect to the ERISA and tax qualification aspects of maintaining the plans. Will the two employers remain related enough to avoid the securities law and investment company law issues with jointly maintaining the 401(k) plan as the ownership of A shifts because of the ESOP?

There is a recent thread that addresses the uncertainties about what “related enough” means.

[Artie M]

Not sure what you mean by "co-sponsor".  It is more likely that they both participate in the same plan with one of them being the actual sponsor.  Two entities, whether "related" or not, can participate in the same 401(k) plan.  If they are not related (i.e., not in the same controlled group or affiliated service group), it would simply mean that the plan would be a multiple employer plan, which is really not a big deal.  As you are describing, currently the Company that maintains the ESOP would, at least, initially be owned by individual shareholder(s) and the ESOP but at some point be 100% owned by the ESOP.  There is no issue with a Company maintaining both a 401k and an ESOP.  There should be no issue with the ESOP company participating in a 401(k) with multiple employers.  There however may be an issue with multiple companies participating in an ESOP (so you wouldn't want this to be  a KSOP).  Note the definition of employer securities.  The ESOP has to be invested in employer securities which are basically shares of the company that employs the participants.  You generally cannot give employer securities to non-employees.  However, depending on the structure you might. For instance, if the two entities form a parent company that owns 100% of the two separate companies, then employees of the subsidiaries could participate in the ESOP if the stock of the parent company is used under the ESOP.  

[QDROphile]

Multiple employer 401(k) plans do not have a presumptive exemption from registration under the Securities Act or the Investment Company Act. The relationship (not well defined at all) between/among the employers may be such that they still qualify for an exemption or a no-action position of the SEC. State securities laws often look to or parallel federal law exemptions, so registration under state law must be considered.

If your multiple employer plan is exempt because of an ownership relationship (short of a controlled group, as you report) the exemption may be lost because the ownership relationship will gradually change as the ESOP gradually acquires more and more shares of the ESOP sponsor. But who knows? And who cares? I am unaware of any action based on failure of a multiple employer 401(k) plan’s failure to register.

[Dougsbpc]

Thanks for all the good opinions.

In this case, there is no controlled group or affiliated service group with respect to company A and company B. So if company A sponsors the ESOP and also sponsors a 401(k) plan, I would think company B could become a participating employer in the 401(k) if it wanted to. Then, as mentioned, the 401(k) plan becomes a multiple employer plan. Company B would not participate in Company A's ESOP and since they are not related entities, I would think theier would be no testing issues involved.

It seems to be mentioned that company B might need to register under the securities act. If it is not a related employer, I would not think this would be a requirement. Does this mean that just because company B becomes a non-related employer participating employer in company A's 401(k) plan, that the registration would be required?

Thanks again.