If an ESOP allows stock and cash in the same participant account, can

[Guest EddieESOP]

If an ESOP allows Stock and Cash in the same participant account, then can a terminated participant request a direct rollover to an IRA for the cash portion?

[RLL]

It would be permissible under the Internal Revenue Code, but....what does the ESOP plan document provide?....what is the ESOP's benefit distribution policy?

[Alf]

Maybe, but . . .

One problem that may come up is that the IRA will not qualify as a conduit IRA that can later be rolled back into another qualified plan. Conduit IRAs must still be funded with "qualified total distributions". See IRC 408(d)(3)(A)(ii) and 402(a)(5)(F)(i) that define "rollover contribution" for purposes of IRC 408(d)(3)(A)(ii). This may not be a major concern to you.

[Guest EddieESOP]

RLL, Alf

Thanks for the prompt comments.

After reviewing the Plan Document further, it does have a Direct Rollover Provision; however, it is silent regarding a “partial” Direct Rollover, cash only not stock. The entity’s common stock is not publicly traded.

Given the above, any comments on a cash only Direct Rollover?

[Guest Jim Vogl]

You could amend the plan to make it clear. Without language in the plan, I would tend to treat the cash and stock the same for distribution purposes.

As food for thought, I have a client in which the plan was drafted to specifically provide that the other investment account can be distributed to the eligible participant immediately upon the participant's election but that the stock account is delayed in accordance with 409. The client has been using this strategy to pay out participants whenever it has sufficient company cash flow. It works like this, whenever a participant has a right to a distribution of his or her other investment account, the employer decides arbitrarily whether or not it has sufficient cash to redeem all or part of the eligible participant's stock account. If the company redeems the stock, the proceeds go into the other investment account and are eligible for distribution by the participant. While the client likes this arrangement, I believe that there are the following problems: (1) the redemption requires an appraisal or opinion of value by an independent appraiser which is costly; (2) there are questions of whether or not there is too much administrative discretion in violation of the IRC 411(d)(6) which prevents an employer from denying an optional form of benefit through administrative discretion; and (3) even if (1) and (2) are not problems once you giving participants the right to their entire account balance it at the very least creates an entitlement mentality that could result in litigation because as my 6 year old says "its not fair". In other words, I don't recommend this strategy.

[Kirk Maldonado]

Alf:

I think your version of the Code is out of date. Section 408©(3)(ii) simply refers to Section 402 (not any particular portion thereof) for the definition of "rollover contribution" and Section 402(a)(5)(F) does not exist (anymore).