Can anyone recommend a reference for more information on reimbursement for expenses of establishing and administering an ESOP under Code Section 409(i)? I find very little on it and unfortunately many searches turn up materials on 409(l) rather than the actual (i).

409(i)(1) provides that, "as reimbursement for the expenses of establishing the plan, the employer may withhold from amounts due the plan for the taxable year for which the plan is established (or the plan may pay) so much of the amounts paid or incurred in connection with the establishment of the plan [up to 10% of the first $100,000 the employer transfers to the plan plus 5% of the excess]."

We represent an individual who is selling his entire ownership in the company to a new ESOP. He would like to get some of his costs involved in this process paid by the ESOP or the company and we are trying to use 409(i).

An indirect way would be to negotiate with the company that it can take advantage of 409(i) to contribute less to the ESOP and so, since it has more money available to it, it can pay some to the seller to offset its costs. I am hesitant however to have an agreement directly tying the amount paid to the seller to the amount the company holds back from the ESOP. Do I need to be so concerned?


The statute includes the parenthetical, "(or the plan may pay)". I'm more hesitant to use money coming directly from the plan. I haven't done a thorough prohibited transaction analysis, but my initial thought is that a payment from the plan to the seller, even after he no longer owns any of the company, could be a prohibited transaction. Likewise, a payment from the plan to others on behalf of the seller seems problematic (both prohibited transaction and exclusive benefit concerns).

Any thoughts on how to get a payment to the seller or where to get additional analysis on 409(i) would be appreciated.

You might find that 409(i) does not apply to ESOPS. Only certain provisions under 409 apply to ESOPs. Section 409 applied generally to tax credit ESOPs and certain subsections are obsolete.

I agree with QDROphile--no more TRASOPs or PAYSOPS, so no more applicability of IRC Section 409(i). It is only through cross-references that some IRC Section 409 provisions still apply (e.g., IRC Sections 401(a)(22), (23), & (28) and 4975(e)(7) & (8)). Even the ESOP Association doesn't mention this expense reimbursement in its discussion of ESOPs (at least that I can find). I would think, however, that if the expenses relate directly to plan administration, and are not grantor expenses, then the general rules that (i) the assets of a qualified plan can be used to pay administrative expenses, and (ii) a qualified plan's administrative expenses can be paid by the employer and deducted as ordinary and necessary business expenses, would apply.

You can find a bit more on the history of TRASOPs/PAYSOPs if you search the ESOP topic using "TRASOP".

It is clearly inappropriate and illegal for the seller's costs to be paid directly or indirectly by the ESOP.

The seller should pay his own costs.