It’s easiest to think of an ESOP loan as essentially a mortgage on the ESOP’s shares held in its suspense account. If the stock is sold, the ESOP trustee will pay off the debt and then the net proceeds from the payment of that debt will be the gain on the sale of that stock which goes to the participants’ accounts. If suspense account shares are sold and there is money left over after the loan is paid off, it should generally be treated as recognized gain on the Form 5500 and trust accounting with the income/earnings on the allocated shares (and allocated in proportion to stock account balances), and should not be treated as additional employer contributions subject to 415 limits. The same treatment should apply if shares are surrendered to satisfy the loan, however, it is good to confirm in either scenario.
The Sale of the Company Is an Asset Sale
If the sale of the company is an asset sale, the company may use cash from the asset sale to redeem shares held in the ESOP suspense account and/or make a final contribution to pay down the ESOP loan. In either case, cash will flow back to the company to pay off the ESOP loan. This will be followed by liquidation of the company with a liquidation distribution (cash payment) to the ESOP of the company’s remaining cash/assets. The ESOP can then distribute cash to participants to wind up the ESOP.
ESOP Is Terminated Not in Connection with a Third-Party Sale
If the ESOP is being terminated, not in connection with a third-party sale, and the company does not have cash, the ESOP can surrender shares to satisfy the loan. The fair market value of shares surrendered cannot exceed the outstanding loan balance. Any shares remaining in the suspense account can be allocated after the loan is satisfied.
There are other variables and considerations that depend on the circumstances for the loan pay off. Depending on circumstances, the trustee may ask for a final contribution and loan payment to benefit the participants, or the trustee may ask the company to forgive all or a portion of the outstanding loan so more shares may be released. This may be in consideration for giving up or losing the benefit of future contributions to the ESOP. Care should be taken in analyzing the context and consideration being negotiated with the ESOP trustee when the employer is considering terminating an ESOP with an exempt loan.
Transcript
When an ESOP company is sold, all of the shares are sold or all of the assets of the company are sold. In this video, we discuss who pays the ESOP loan. It’s easiest to think of an ESOP loan as essentially a mortgage on the ESOP shares. If the stock is sold, the ESOP trustee will pay off the debt and then the net proceeds from the payment of that debt will be the gain on the sale of that stock which goes to the participants accounts.
If the sale of the company is an assets sale followed by a liquidation of the company then the liquidation distribution to the ESOP will be used by the ESOP trustee to pay off the ESOP loan with the remaining profit after the sale of those shares and payment of the loan flowing to the ESOP’s participants’ accounts as profit from the sale.
