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ESOP put option

If company stock is not publicly traded a participant must be given a put option. A put option gives the participant a right, but not the obligation, to require the company to repurchase the stock under a fair valuation formula as determined by an independent ESOP appraiser.

The ESOP put option is provided for under IRC Section 409(h) – Right to demand employer securities; put option:

IRC 409(h) Right to demand employer securities; put option

(1) In general

A plan meets the requirements of this subsection if a participant who is entitled to a distribution from the plan—

(A) has a right to demand that his benefits be distributed in the form of employer securities, and

(B) if the employer securities are not readily tradable on an established market, has a right to require that the employer repurchase employer securities under a fair valuation formula.

The ESOP put option must be available for 60 days after distribution and for an additional 60 days in the next plan year.

(4) Put option period

An employer shall be deemed to satisfy the requirements of paragraph (1)(B) if it provides a put option for a period of at least 60 days following the date of distribution of stock of the employer and, if the put option is not exercised within such 60-day period, for an additional period of at least 60 days in the following plan year (as provided in regulations promulgated by the Secretary).

The company may permit the ESOP to purchase shares tendered under the put option. However, the company cannot transfer the put option requirement to the ESOP.

Amounts diversified are not subject to the put option.

The right to demand securities with the ESOP put option is what creates the company’s ESOP repurchase obligation.


aaron juckett

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