Can an ESOP delay distributions to terminated employees (e.g., until after 5 one-year breaks-in-service), but convert the terminated employees' accounts to cash upon termination of the employees' employment, i.e., buy back the stock for cash (which would then be invested at the direction of the former employee)?

The ESOP is nearing the end of its loan repayment and this method would enable it to acquire additional shares to allocate to active employee/participants.

Thanks.

[This message has been edited by EMC (edited 03-05-2000).]

[This message has been edited by EMC (edited 03-05-2000).]

Employees must have a right to receive their distributions in stock, whether the distributions are at the time of termination or five years later. You can't automatically buy back the shares unless the participants exercise their put rights.

Until the distributions are actually made, their accounts will have to be kept in stock, so I don't think that you can convert their accounts to cash.

My mistake. This is an S Corporation whose bylaws prohibit distributions of stock. I left out that important detail. Any thoughts?

There's an article you should read. It's call "Converting Employees' ESOP Accounts to Non-Stock Investments." Journal of Taxation, November 1999 at page 299.

What you propose doing is OK. It is not uncommon for an ESOP of a closely-held company to "convert" the accounts of former employees into assets other than company stock. This can be done even when participants have the right to demand distributions in company stock.