ESOP Participant Distributions

Focusing now on ESOP distributions to existing participants, the law extends considerable flexibility.  When a participant leaves because of retirement, death or disability, benefits must commence in the year following the triggering event and continue in equal increments for up to the following 4 years.  But, where a participant leaves because of other than retirement, death or disability, the commencement of distributions can be delayed for up to 5 years—and then paid over the next 5 years starting in the 6th year, so that the company can actually have 11 years within which to fund its ESOP so that it can complete the payment process.  But, in deference to the fact that banks don’t like to see borrower monies used to redeem stock before they are paid, and to encourage banks to make ESOP loans, Congress enacted a provision allowing no payments to be made on stock that was acquired with debt until that debt has been paid in full.  The IRS has, however, (perhaps incorrectly) taken the position that this provision applies only to payments due from C corporation ESOPs.

It must be recognized that even though payments may not be required for some time, they should be planned for.  I suggest that a sinking fund be set up and funded.  Frequently key-man life insurance is used as a segment of this funding process.

Annual Appraisal Requirement

As previously noted, the law requires that the ESOP’s company stock be appraised annually, and the worth of the stock that has been allocated to participants’ accounts must then be communicated to them in writing.

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