ESOP for an S Corp. was written to require distributions in cash.

1) Would there be a 411(d)(6) issue in amending the plan to provide that the distribution will be either in cash or in stock subject to the requirement that the stock immediately be sold to the company?


2) Alternatively, is there any way that the ESOP could borrow money for the distribution and treat it as an acquisition loan for the departing participants shares? The ESOP really isn't "buying" the shares from the departing participant, it is distributing cash under the terms of the Plan.

KJohnson ---

(1) IRC sections 409(h)(2)(B)(i) and 411(d)(6)© and ERISA section 204(g)(3) would permit such an amendment to the ESOP.

(2) Prohibited Transaction Class Exemption 80-26 permits interest-free loans from the employer to the ESOP for the purpose of funding expenses, including benefit distributions. The IRS has issued determination letters to numerous ESOPs which include provisions treating such loans in the same manner as ESOP stock acquisition loans for purposes of allocations of stock to participants' accounts.

Thanks RLL-


In this context I am trying to figure out the meaning and purpose of the langauge quoted below from 1.411(d)-4 Q&A 2 in the ESOP and stock bonus exception to the bar from eliminating optional forms of benefits. Do you know what this is getting at? The situation is a profit sharing plan, converted to an S ESOP in 2003 that only allowed for cash distribitons, that wants to add the mandatory put in 2004. It would seem that it does not matter whether it is a mandatory put or a cash distribution since the participant still gets cash--either from the Employer or the ESOP.


ii) ESOP investment requirement. Except as provided in paragraph
(d)(2)(iii) of this Q&A-2, benefits provided by employee stock ownership
plans will not be eligible for the exceptions in paragraph (d)(1) of this Q&A-2 unless the benefits have been held in a tax credit employee stock ownership
plan (as defined in section 409 (a)) or an employee stock ownership plan
(as defined in section 4975 (e)(7)) subject to section 409 (h) for the
five-year period prior to the exercise of employer discretion or any
amendment affecting such benefits and permitted under paragraph (d)(1)
of this Q&A-2. For purposes of the preceding sentence, if benefits held
under an employee stock ownership plan are transferred to a plan that is
an employee stock ownership plan at the time of transfer, then the
consecutive periods under the transferor and transferee employee stock
ownership plans may be aggregated for purposes of meeting the five-year
requirement. If the benefits are held in an employee stock ownership
plan throughout the entire period of their existence, and such total
period of existence is less than five years, then such lesser period may
be substituted for the five year requirement

KJohnson ---

The provision that you cite is intended to require a five-year transitional period (in the case of a non-ESOP that is "converted" to an ESOP) before the ESOP can take advantage of the discretion permitted under IRC section 411(d)(6)©.