Section 401(k) Plans and Employee Ownership

Fifth Edition (2008); softcover, 156 pp. (6" x 9"). $25 for NCEO members; $35 for nonmembers.

In the 1990s, company stock became a very popular investment choice in 401(k) plans; as a result, the 401(k) plan became one of the main vehicles of employee ownership in the U.S. However, in the wake of scandals at Enron and other companies, the use of company stock in 401(k) plans has become controversial, and many lawsuits have been filed. Now in a new edition revised in 2008, this book discusses in detail how company stock is used in 401(k) plans, how such arrangements can work in conjunction with employee stock ownership plans (ESOPs), and what legal issues are raised by using company stock in a 401(k) plan or converting a 401(k) plan to a combination 401(k)/ESOP.

Preface
The 401(k) Plan as an Employee Ownership Vehicle
Recent Litigation over Company Stock in 401(k) Plans
401(k) and ESOP Securities Law Issues
Reaching an Optimal Level of Employee Ownership in a Profit Sharing/401(k) Plan
Dividend Deductions for Public Companies with 401(k) Plans
Converting a 401(k) Plan to an ESOP and Creating a KSOP
ESOP/401(k) Combinations: Administrative Issues and Perspectives
Using Your 401(k) Plan as an Incentive to Improve Corporate Performance

Excerpts

From Chapter 2, "Recent Litigation over Company Stock in 401(k) Plans"

In Shannahan v. Dynegy Inc., No. H-06-1060 (S.D. Tex. Nov. 6, 2006), a district court allowed employees in a 401(k) plan to proceed with a lawsuit alleging Dynegy provided fraudulent information to participants about its energy trading. The Dynegy plan matched employee deferrals with company stock and also allowed employees to choose to invest in that stock. In making their choices, employees were urged to refer to SEC filings that turned out to be false. The court ruled that plan language requiring matching contributions to be made in company stock precluded fiduciary choice on this issue but that the case could proceed on the information charge as it applied to employee investment decisions. The court also concluded that the plaintiffs could sue for restitution to their individual accounts and still have standing because their losses were still part of plan losses.

From Chapter 5, "Dividend Deductions for Public Companies with 401(k) Plans"

If the ESOP portion of the 401(k) plan extends to amounts that are invested in company stock at the direction of plan participants, an issue arises as to whether the plan must allow participants the right to elect to receive all amounts previously credited to the company stock fund paid in the form of common stock. If so, a plan sponsor would be required to track investments in and out of the company stock fund, at an additional administrative cost. However, the author believes that this tracking should not be necessary if a participant can direct the investment of his or her entire account balance back into the company stock fund prior to termination of employment, which is effectively an election to receive his or her benefits paid in the form of company stock. A plan sponsor that is concerned about this issue can raise the issue directly with the IRS when requesting a favorable determination letter concerning the tax-qualified status of the 401(k) plan.

From Chapter 6, "Converting a 401(k) Plan to an ESOP and Creating a KSOP"

The PPA has not only accelerated vesting and increased investment opportunities and alternatives for participants and beneficiaries but also expanded the distribution alternatives for participants and beneficiaries of defined contribution plans. Provided below is a sample of just a few revisions to the rules governing distributions from defined contribution plans. Sections 302 and 303 of the PPA modify the interest-rate assumptions for lump-sum distributions that serve as an alternative to an annuity option. Section 824 of the PPA permits participants to roll over eligible rollover distributions (as defined in Section 401(a)(31) of the Code) to Roth IRAs as well as traditional IRAs and other eligible retirement plans—previously, Roth IRAs fell into the excluded category of retirement plans, which still includes SIMPLE IRAs and Coverdell Education Savings Accounts. Section 826 of the PPA expanded the circumstances under which a participant may request and receive a hardship distribution. Section 828 of the PPA removes the 10% tax under Section 72(t) of the Code from early distributions to public safety employees. Section 829 of the PPA permits nonspousal beneficiaries to roll over eligible rollover distributions to inherited IRAs—previously, nonspousal beneficiaries could not roll over any distribution from employee benefit plans. Section 1001 of the PPA requires the DOL to issue regulations under Section 206(d)(3) of ERISA clarifying the requirements for qualified domestic relations orders. Section 1004 of the PPA permits a participant 96 Section 401(k) Plans and Employee Ownership to elect a "qualified optional survivor annuity" under certain circumstances. Section 1102 of the PPA expanded the distribution notice and consent periods from 30 days to 90 days or from 90 days to 180 days, where applicable. Most of the changes will not require amendments to employee benefit plans; however, employers should take note of the changes, and the plans should adopt appropriate distribution policies and other distribution materials.

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