ESOP price protection sums may be rollover eligible

Tax Hot Topics newsletterIn a general legal advice memorandum (AM 2019-003), the IRS determined that certain amounts received under an employee stock ownership plan (ESOP) that were attributable to a price protection arrangement may in some cases be eligible for rollover distributions under Section 402(c)(4). Under the ruling, an ESOP trustee and the employer maintaining the ESOP commonly entered into price protection agreements, which are designed to provide additional payments to recipients of stock distributions from an ESOP during a fixed time period following a loan taken on by the employer to increase the number of employer shares it holds.

The IRS addressed two scenarios – (1) where the price protection amounts were paid directly by the employer to the participants, and (2) were the price protection amounts were contributed to the ESOP by the employer. With respect to the first scenario, the IRS concluded that the price protection amounts were not eligible rollover distributions under Section 402(c)(4) because they were never part of the participants’ ESOP account balances or sales proceeds from shares held in the plan.

With respect to the second scenario, the IRS concluded that the price protection amounts may be eligible rollover distributions within the meaning of Section 402(c)(4) because they were contributed and allocated to the participants’ ESOP account balances. Accordingly, the IRS concluded that these price protection amounts may be excludable from income if the amounts are rolled over and all other requirements under Section 402(c)(4) are satisfied.

Jeff Martin
Washington National Tax Office
T +1 202 521 1526

Keith Mong
Managing Director
Washington National Tax Office
T +1 202 521 1554

James Sanchez
Senior Associate
Washington National Tax Office
T +1 202 861 4107

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