Question:

Can an S Corp (a bank) offer its own stock as an investment option in its 401(k) plan? If so, are there any issues to be worried about?

Facts:
* Non-publicly traded.
* Not an ESOP.

Thanks!

UBTI

Did you mean "UBIT"?

UBTI = Unrelated Business Taxable Income

UBIT = Unrelated Business Income Tax

(or something like that)


so... UBTI is subject to UBIT

Qualified plan trusts are permitted to be shareholders in S corporations [I.R.C. Sec. 1361©(6)]. All types of income that pass through from an S corporation are taxable, however, including interest, dividends, and other items that would otherwise be excluded [I.R.C. Sec. 512(e)(1)]

Warning - the UBTI for a qualified plan shareholder of an S corporation includes both the pass-through income and any gain on the ultimate disposition of the stock. See IRC Section 512(e)(1)(B)(ii). The IRS has stated that disposition for this purpose includes a distribution of shares from the plan to the participant. If I had a client that actually wanted to do this, I would challenge that conclusion of the Service.

But, this can be an extremely costly step so caution is advised.

Don't you also have to worry about violating the limitation on the maximum number of shareholders in an S Corporation if shares are distributed to participants?

Also, isn't there a concern if the stock is rolled over into an IRA and not immediately redeemed?