Put to ESOP in addition to Employer

[smm]

I'm setting up an ESOP for a company. The client wants to know if the participant can "put" the shares to the ESOP in addition to the employer as required by 409(h). I did some research and the legislative history and a few secondary sources suggest that this is permissible. I'm uncomfortable with the idea. Any thoughts? Thank you.

[RLL]

Doesn't "smm" stand for "summary of material modifications" ?

What your client wants to do is clearly permissible under certain circumstances. Check out the 1977 ESOP loan regulations, at Treas. Reg. Section 54.4975-7(B)(10) and DOL Reg. Section 2550.408b-3(j), which provide, in part, as follows:

"...The put option must permit a participant to put the security to the employer. Under no circumstances may the put option bind the ESOP. However, it may grant the ESOP an option to assume the rights and obligations of the employer at the time that the put option is exercised..."

Although these regulations pre-date the 1978 addition of Section 409(h) to the IRC, they have not been modified by the IRS or DOL.

Note, however, that a decision for the ESOP to purchase the stock (when a put option is exercised) is subject to the fiduciary rules of ERISA Section 404(a)(1).

[Guest Jim Vogl]

I agree with RLL and I want to add that if you want to see a weird case then look up Roth v. Sawyer-Cleator. My old firm lost this case which is related to this issue. I think it was a bad decision. This case demonstrates that when you go to Court, you never know what result you will get when ERISA is involved.