ESOP Lawyer & Attorney : Sheppard Mullin Law Firm : Employee Stock Ownership Plans : ESOP Law Blog

In the first article on this subject that we recently posted, we considered the administrative and fiduciary issues that arise when an ESOP sells company stock to the company to fund its benefit distributions.  The fiduciary issues under the Employee Retirement Income Security Act of 1974, as amended ("ERISA") include the need to obtain a new valuation opinion letter from the ESOP's appraiser updated to the date of the sale.  This updated opinion letter is required for the sale to be exempt from the prohibited transaction rules of under Section 4975(c)(1)(A) of the Internal Revenue Code of 1986, as amended ("Code") and Section 406(a)(1)(A) of ERISA.  In this second article, we consider alternative methods for handling benefit distributions which avoid (or at least reduce) the administrative and fiduciary issues associated with the sale of company stock and the updated valuation opinion.  We assume the company's objectives are:  (1) to make ESOP distributions in the form of cash in order to avoid having former employees retain stock in the company,  (2) to make no additional ESOP contributions to fund this obligation and (3) to preserve stock ownership for ESOP participants who are active employees.

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ESOPs often choose to make benefit distributions in the form of cash, rather than in company stock. Some of these ESOPs obtain the necessary cash by selling company stock to the company. This sale transaction raises two fiduciary issues under the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). First, the sale is a prohibited transaction under Section 4975(c)(1)(A) of the Internal Revenue Code of 1986, as amended ("Code"), and Section 406(a)(1)(A) of ERISA, unless the sale meets the exemption in Section 408(e) of ERISA. Second, under Section 404(a)(1) of ERISA, the fiduciary must satisfy itself that the decision to sell company stock is in the best interests of the ESOP's participants.

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