ESOP termination in bankruptcy – US. Who pays?

What happens if a company, that you work for, is in chapter 11 and the new owners want the ESOP plan terminated. The present value of the stock is $0. The stock is not publicly traded. There is some cash left in the cash accounts associated with each participants ESOP account. The trustee is using the cash for the ESOP termination costs. Is this legal or should the company be picking up the costs?

Well, in this case, the court has authorized the payments out of the participants cash funds. As well, if you refer to your plan specific documentation, you will probably find that the company is under no obligation to pay for any plan expenses and the Trustee can use the ESOP funds to pay for costs.

The question of whether plan assets can be used to pay the costs of plan termination is addressed in DOL Advisory Opinion 97-03A. It is a fiduciary question under ERISA (employee retirement income security act). and requires an analysis of the terms of the plan document and of whether the termination of the plan is for the benefit of the participants or the plan sponsor. The cash in the ESOP is not an asset in the bankruptcy estate of the employer. While 97-03A does not refer to ESOP’s it does mention tax qualified pension plans, which indicates that the plan pays for the termination, specifically, “Accordinly, reasonable expenses incurred in implementing a plan termination would generally be payable by the plan.”

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What is an ESOP?

An Employee Share Ownership Plan (ESOP) allows employees, who qualify, to purchase shares in their employer’s company, with or without the monetary assistance from the company.

Employees can acquire shares, and ownership through an ESOP that can range from 1% to 100%. An excellent method for small business owners wishing to retire and sell their business.

The key aspect is that employees have an ownership stake in the company they work for, and share in the risks and rewards that accrue to it.

Currently, there are four types of ESOPs in Canada:
1) ESOPs started by employers to reward employees for their effort in making the company successful.
2) ESOPs started by public companies to reward key employees for their efforts, then expanded to all employers through matching share purchase programs.
3) ESOPs started due to financial crisis, utilizing provincial ESOP legislation. A relatively recent development, these are used mainly to save jobs.
4) ESOPs started by employers and/or employees utilizing current tax laws and provincial legislation – some are for companies in crisis as well as healthy companies.