Lump Sum Payment Offered by Former Employer

[AdamTM]

Hello,

A former employer offered an ESOP payout in lump sum. They will be diversifying the assets for anyone who does not take the lump sum, and the investment will be into a money market account. To reframe this more concisely, my shares will be purchased back by the company prior to 12/31/2025. I know the company is likely experienced more thanv a 3X increase in share value due to their rapid growth in the past year. The most recent valuation was at 12/31/2024. Will they need to perform an interim valuation, or will my shares be valued at the 12/31/2024 value, which is almost certainly 1/3 or less of the current value of shares? Anything I should do? Wondering if there are attorneys who specialize in this area whom I should consult with, or if this is a lost cause. Thank you!

[ESOP Guy]

There is nothing stopping them from using the 12/31/2024 stock price as long as it all happens on or before 12/30/2025. (Edit date from 12/20/2025 to 12/30/2025)  

 

There is nothing you can do.  This is common and done all the time in this industry.  The plan is on very solid ground.  If  you hire a lawyer you will be spending money to only lose.  

 

I would add it seems hard to know the value will 3x.   But this is the reason ESOPs do what is happening.  Management doesn't want to compensate former employees but want the increase to go to current employees who they see as being the primary contributors to the increase at this point. 

[AdamTM]

Thank you, ESOP guy!

[RealityCheck]

It may be productive to speak to an attorney on this. Generally, the employer may buy the stock from the ESOP based on a valuation as of the date of the transaction.  Otherwise the purchase does not meet the requirements for an exemption from the prohibited transaction rules. So there may be a prohibited transaction violation if the purchase is in December, 2025 based on the 12/31/2024 valuation.  In contrast, if the employer buys the stock from the participant after it has been distributed to him under the put option rules, the last valuation can be used (generally).

Also, many are of the view that the money market as the only investment is not prudent.  This is getting some attention in the ERISA litigation world.  

[ESOP Guy]

On 12/20/2025 at 8:34 AM, RealityCheck said:

It may be productive to speak to an attorney on this. Generally, the employer may buy the stock from the ESOP based on a valuation as of the date of the transaction.  Otherwise the purchase does not meet the requirements for an exemption from the prohibited transaction rules. So there may be a prohibited transaction violation if the purchase is in December, 2025 based on the 12/31/2024 valuation.  In contrast, if the employer buys the stock from the participant after it has been distributed to him under the put option rules, the last valuation can be used (generally).

Also, many are of the view that the money market as the only investment is not prudent.  This is getting some attention in the ERISA litigation world.  

You're just muddying the water unnecessarily.      Even you admit that all the plan has to do is distribute the shares if the company wants to buy them.  Or more likely the original commentor is using nontechnical language for a very technical event.  Since he mentioned the putting the money into a money market more likely the company isn't actually buying the shares but recycling them within the ESOP.   To most people in the ESOP and not in the industry the ESOP and company are basically interchangeable when legally they are very different.  This company would have to have the most incompetent advisors to have the company buying these shares directly from the plan when there are so many ways to avoid the issue.  

I stand my advice you would be wasting your money to go to an attorney.   Answers to non-technical people should follow the KISS principle:  Keep It Simple Stupid works well. 

Reality does bring up a good point you could ask if they think a money market is prudent to invest your money.  Or better take your funds out of the ESOP and get a better set of investments of our choosing in an IRA if you want. 

 

 

[RealityCheck]

The facts stated that the shares would be repurchased by the company at the 12/31/2024 valuation and the money market investment fact doesn’t lead to the conclusion that the shares will be recycled.  Confusing recycling within the plan (or whatever technical term is appropriate) with a distribution of shares  from the ESOP to the participant allowing the employer to repurchase the shares based on the last valuation is not correct.  Generally a distribution requires participant consent.  Here the facts are that, if the participant does not consent to a distribution, his shares will be cashed out.  This will happen either by the company purchasing the shares based on a stale valuation (per the facts) or, as ESOP Guy guesses, by using cash in the ESOP enabling the plan administrator to reallocate cash and stock between the accounts of active and inactive participants (those who have terminated employment).  To do this before 12/31/2025, the plan administrator would need the discretion to declare a special plan valuation date a short time before then based on a stock valuation that is almost a year old.  I wouldn’t hazard a guess about how the plan document is drafted here except to note that this may be key to the participant’s situation.  Now if the employer was going to do this based on the 12/31/2025 valuation, then the participant would be stuck.

[MBESQ]

My suggestion for Adam is to request a copy of the plan document and compare the terms with what he was told by the plan administrator.  It has to be provided within 30 days of a request.  The plan distribution provisions are usually one of the most complicated portions in an ESOP plan document.  I agree with Reality that one should not hazard a guess on its terms here.  
 

Generally the law does not protect the form of a plan investment in an ESOP, at least on a per participant basis. So I concur with ESOP Guy here that this can be done.  Echoing Reality, however, whether it has been done (or will be) consistent with the terms of the plan document or the prohibited transaction rules on employer stock transactions is not clear from the facts.  If a good deal of money is involved, it is up to Adam to make an informed decision on whether he wants to verify this further while he is still a plan participant.