The IRS Wants to Review Your ESOP Distribution Policy


For the first time, the IRS is requiring that detailed ESOP distribution rules be provided to the IRS as part of the ESOP's determination letter submission.

Profit sharing plans and 401(k) plans are required to have fixed distribution rules stated in the plan documents--ESOPs are not subject to this requirement. In recognition of the special issues confronting ESOPs, however, such as repurchase liability and funding, Congress provided companies sponsoring ESOPs with a great deal of flexibility in structuring the timing and form of benefit distributions as long as the policy complied with the statutory limits on deferral periods.

Typically, an ESOP plan document states the longest permissible deferral periods for distributions, leaving the details of benefit distribution planning to be spelled out in the ESOP distribution policy.

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Sheppard Mullin Richter & Hampton LLP on:

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