ESOP Distribution Timing: Loan Exception

Posted by Aaron Juckett, CPA, CPC, QPA, QKA on Sun, Jan 17, 2010
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We have discussed the ESOP distribution timing rules for terminations due to Death, Disability, and Retirement and Other Separations of Service. If there is an outstanding ESOP loan, the Internal Revenue Code allows payments to be deferred until the close of the plan year in which the loan is paid in full.

[For S Corporation ESOPs, there is some controversy about the loan exception because the Code only references the C Corporation deduction limit language of IRC Section 404(a)(9). However, many S Corporation ESOPs still utilize the loan exception. To gain more comfort, the loan exception should be included in your plan document so you are able to obtain a determination letter and gain more comfort.]

IRC Section 409(o)(1)(B) - Qualifications for tax credit employee stock ownership plans - Distribution and payment requirements – Distribution requirement – Exception for certain financed securities

§ 409. Qualifications for tax credit employee stock ownership plans

(o) Distribution and payment requirements

A plan meets the requirements of this subsection if—

(1) Distribution requirement

(A) In general

The plan provides that, if the participant and, if applicable pursuant to sections 401(a)(11) and 417, with the consent of the participant's spouse elects, the distribution of the participant's account balance in the plan will commence not later than 1 year after the close of the plan year—

(i) in which the participant separates from service by reason of the attainment of normal retirement age under the plan, disability, or death, or

(ii) which is the 5th plan year following the plan year in which the participant otherwise separates from service, except that this clause shall not apply if the participant is reemployed by the employer before distribution is required to begin under this clause.

(B) Exception for certain financed securities

For purposes of this subsection, the account balance of a participant shall not include any employer securities acquired with the proceeds of the loan described in section 404 (a)(9) until the close of the plan year in which such loan is repaid in full.

Topics: ESOP distributions, distributions, ESOP, employee stock ownership plan

Aaron Juckett, CPA, CPC, QPA, QKA
Written by Aaron Juckett, CPA, CPC, QPA, QKA

Aaron is President and Founder of ESOP Partners and provides implementation, administration, and consulting services to hundreds of companies. He is a member of The ESOP Association (TEA) and the National Center for Employee Ownership (NCEO).

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