By Victor Alam, Esq
We recently came across a company whose ESOP distribution procedures prohibited participants from electing a stock distribution. Those plan provisions were in the original plan document when the ESOP plan was first adopted years ago. When the company converted from an S corporation to a C corporation a few years later, the plan document was not updated to specifically contain the necessary language to permit the plan to prohibit a participant’s “right to demand” employer stock as a C corporation.
As a plan sponsor, you should reaffirm the ESOP’s distribution procedures are in line with the plan document. The best way to do that is to review the plan document with your ESOP plan counsel and the representatives of your company who oversee the plan’s distribution election forms that are sent to the participants on a regular basis. The assumption that older plan provisions are still being followed can be problematic.
Victor Alam is the Corporate Counsel of The Menke Group and has advised ESOPs since 1991.
