Employer Securities & Participating Employer

I'm trying to wrap my head around this and would love some input.

We have a 401(k) plan with qualified employer securities. The plan sponsor is a C-Corporation and is privately-held. The owner formed a new business in 2022 under a separate LLC that they own 100% and hired employees in early-2022. Since the C-Corporation is in a controlled group with the newly-formed LLC, the LLC was added as a participating employer of the plan effective 1/1/2023, recognizing prior service with the LLC. We expect there to be employees that meet the plan's eligibility requirements in July 2023. My question is -- how does the qualified employer securities investment option work with the employees of the LLC?

Would the LLC employees simply be treated the same as the employees of the C-Corporation and have the option to purchase stock in the C-Corporation?

Or, is there some other piece that I'm missing. ....such as, since the C-Corporation is technically not their employer, would the option to purchase employer securities in the C-Corporation be unavailable? Although, if this is the case, I would presume this would run into benefits, rights and features issues.

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You will want to review the QES offering. What does the offering say about who should be offered the QES opportunity and when (e.g. does the offering close after a certain time period)? Important to note, if 401k Plan monies were invested in the C Corporation are the monies being utilized by the LLC? This could result in a prohibited transaction depending on whether the LLC is a wholly owned subsidiary of the C Corporation and/or whether the activities of the C Corporation rise to the level of an Operating Company.

ERISA § 408(e)’s statutory prohibited-transaction exemption can apply only regarding a plan’s acquisition or sale of qualifying employer securities, as defined in ERISA § 407(d)(5).

ERISA § 407(d)(5)’s definition of “qualifying employer security” includes the specially defined term employer security.

ERISA § 407(d)(1) defines an “employer security” as “a security issued by an employer of employees covered by the plan, or by an affiliate of such employer.”

ERISA § 407(d)(7) provides: “A corporation is an affiliate of an employer if it is a member of any controlled group of corporations (as defined in [I.R.C. §] 1563(a), except that ‘applicable percentage’ shall be substituted for ‘80 percent’ wherever the latter percentage appears in such section) of which the employer who maintains the plan is a member. For purposes of the preceding sentence, the term ‘applicable percentage’ means 50 percent, or such lower percentage as the Secretary [of Labor] may prescribe by regulation. A person other than a corporation shall be treated as an affiliate of an employer to the extent provided in regulations of the Secretary [of Labor]. An employer [that] is a person other than a corporation shall be treated as affiliated with another person to the extent provided by regulations of the Secretary [of Labor]. Regulations under this paragraph shall be prescribed only after consultation and coordination with the Secretary of the Treasury.”

There is a Labor department rule that interprets ERISA § 407(d)(5).

29 C.F.R. § 2550.407d-5(a) https://www.ecfr.gov/current/title-29/subtitle-B/chapter-XXV/subchapter-F/part-2550/section-2550.407d-5#p-2550.407d-5(a).

There is no Labor department rule that implements ERISA § 407(d)(7)’s delegation.

All four rules interpreting ERISA § 407 were published in 1977, and not revised after.

If there is a doubt on any question L.S. asks, one would want an employee-benefit lawyer’s advice.

And even if one finds that an affiliate’s participant’s account’s investment in the parent corporation’s common shares could be permitted, one would Read The Fabulous Document to discern whether the investment is provided for.

Thank you for the input! Fortunately, none of the 401k Plan monies invested in the C Corporation are being utilized by the LLC so there is no concern there.