ESOP, meet 401(k).

• Author: Mariotto, Don
• Position: Investment Options - Combined 401(k

A combination 401(k) plan and employee stock ownership plan, commonly called a KSOP, can be used to decrease the administrative and legal expenses for employers who maintain both a 401(k) plan and an employee stock ownership plan.

For employers who maintain a stand-alone 401(k) plan and who make contributions of employer stock to the plan, a KSOP also may lessen the fiduciary risk associated with the 401(k) plan holding such stock.

REAPING THE REWARDS

Employers who make matching contributions to a 401(k) plan in the form

of employer stock can reap many benefits.

The first benefit is providing employees with additional motivation to ensure the business' profitability. By enhancing the value of the employer's stock, the employees enhance their own retirement plan benefit.

To realize this benefit, employers must inform employees that the value of their plan benefit that is attributable to employer stock is dependent, in part, on their efforts to make the company more profitable, such as by working more effectively or controlling costs.

A second benefit to employers is a decrease in the cash flow necessary to fund retirement plan contributions by making matching contributions in the form of its stock.

If an employer typically makes a matching contribution in cash, it can retain that cash for other uses, such as purchasing equipment, additional marketing or advertising or developing new product lines.

A matching contribution to a 401(k) plan or a KSOP in the form of newly issued shares of stock is deductible to the employer in the same way as a cash contribution. The amount of the deduction is equal to the value of the stock contributed.

Before deciding whether to make contributions in the form of stock, employers should consider the dilutive effect that action will have on the corporation's other shareholders. Companies should consult with counsel about the application of corporate and securities laws to the issuance of new stock.

A third benefit to a corporation that sponsors an ESOP or a KSOP is the ability of either plan to purchase employer stock from either the employer or from other shareholders.

If an ESOP, or the ESOP portion of a KSOP, holds 30 percent of a C corporation's outstanding capital stock following a purchase of securities from another shareholder, the selling shareholder may defer any gain realized on such sale--and the associated tax liability.

To defer the gain and tax liability, the selling shareholder must file the...