401kSOP for an S corporation

[Guest amvienna]

Has anyone had experience setting up a 401(k)SOP, that is, a combined 401(k) and ESOP plan involving an S corporation? Are there any problems under the S corporation rules if the only contributions to the ESOP portion of the plan are salary deferrals directed by the employees for investment in employer stock? Any other problems from a qualification standpoint?

[RLL]

amvienna ---

I don't think the S corporation rules affect any of the issues in this situation.

[IRC401]

You might want to check with a securities attorney before investing 401(k) money in employer stock.

[Guest amvienna]

We are aware of the securities law issues. However, as to qualification, presumably the 401(k) and ESOP features of the Plan would be tested separately. I presume that the ESOP would remain as an eligible S Corporation shareholder even though the assets of the ESOP might consist only of rollover dollars invested in employer stock and very little new contributions (Other than the salary deferrals directed to employer stock? Anyone have any comments?

[RLL]

amvienna ---

401(k) elective contributions are considered employer contributions for purposes of determining whether there are "substantial and recurring contributions" to a section 401(a) qualified plan, including an ESOP. In addition, there is old IRS guidance holding that a plan can be qualified even if the only contributions are voluntary employee contributions. In your situation, the employer stock acquired with 401(k) salary deferrals is part of the ESOP. Note that the separate testing under the 401(k) rules addresses the ESOP and the non-ESOP portions of the 401(k) plan.