ERSOPs?

There has been some buzz lately (again) about something called an "ERSOP" (employee retirement stock ownership plan). Promoters are offering to install these tax-qualified plans, replete with an independent valuation, for as little as $4,000. They claim to have received many determination letters from the IRS approving the approach.

ERSOPs are not something you will find in ERISA. Instead, they are plans in which an executive typically rolls over funds from a 401(k) or other defined contribution plan account at a current or former employer into a new profit sharing or 401(k) plan in a business the individual starts. That lets the individual use pretax dollars to fund the startup.

Some years ago, promoters were saying that the plans could be set up so that only the initial investors would be able to buy shares, but the IRS, at least informally, said this would be discriminatory in the context of a qualified plan. Now the approach is to get securities registration exemptions and offer the shares to other employees in the context of other plan offerings on the assumption that few, if any, will buy them, and that even if they do, they will not buy many. That is probably usually a safe assumption.

If a plan complies with securities laws by getting a registration exemption (there would a few ways to do this for most very small companies), providing an adequate antifraud disclosure statement (most likely including officer salaries as well as a complete discussion of risks), having at least an annual outside appraisal, performing annual discrimination testing, and otherwise complying with ERISA, these plans are allowable. It seems suspicious, however, that all of this can be done responsibly for fees anywhere close to the range these promoters are saying they charge. Independent valuations, even of very small companies, normally start at several thousand dollars,m and disclosure statements are in a similar price range.

So before jumping on the ERSOP bandwagon, get a second opinion from a well-qualified ERISA expert. It will be a very good investment.