3832 / To what extent can an employee stock ownership plan (ESOP) provide life or health insurance benefits for its participants?

The rules applicable to purchases of life insurance by qualified plans ( Q 3830 and Q 3831) generally apply to employee stock ownership plans ( Q 3817).¹ Thus, if assets are invested primarily in qualifying employer securities, life insurance may be purchased on the lives of participants for the benefit of their estates or named beneficiaries within the limits of the 25 percent “incidental” rule described in Q 3831. Proceeds of an exempt loan ( Q 3817) may not be used by an employee stock ownership plan to purchase life insurance.²

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Planning Point: There appears to be no reason, so long as assets are invested primarily in qualifying employer securities, that an employee stock ownership plan may not purchase key person life insurance in the same way profit sharing plans do, and for essentially the same purpose. Also, should a key person insured be a shareholder, there appears to be no reason death proceeds could not be used to purchase employer stock from his or her estate.

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An employee stock ownership plan must not obligate itself to acquire securities from a particular security holder at an indefinite time determined on the happening of an event such as the death of the holder.³