8917 / What special requirements apply to a stock bonus plan offered by an employer?

If the employer securities held within the plan are not readily traded on a public market, any transactions involving stock require an independent valuation of the stock for that transaction. A stock bonus plan generally is required to give participants the right to demand benefits in the form of employer securities. If employer securities are not readily tradable on an established market, the participant must be given the right to require the employer (not the plan) to repurchase employer securities under a fair valuation formula (a “put option”).²

The requirement that participants have the right to demand benefits in the form of employer securities does not apply in situations where the charter or bylaws of the employer restrict the ownership of substantially all outstanding employer securities to employees, to a qualified plan trust, or to an S corporation.³

The employer must make this put option available for at least 60 days following distribution of the stock and, if it is not exercised within that time, it must be made available for another 60 day period (at a minimum) in the following year.⁴

The plan may repurchase the stock instead of the employer, but the plan cannot be required to do so. Certain banks that are prohibited by law from redeeming or purchasing their own shares are not subject to the requirement that they give participants a put option.⁵

If, pursuant to a put option, an employer is required to repurchase securities distributed to an employee as part of a “total distribution,” the amount paid for the securities must be paid in substantially equal periodic payments (at least annually), over a period beginning within 30 days after the exercise of the put option, and not exceeding five years. The employer must provide adequate security and reasonable interest must be paid on any unpaid amounts. A total distribution is a distribution to the recipient within one taxable year of the balance to the credit in his or her account.⁶ If an employer is required to repurchase securities distributed to an employee as part of an “installment distribution,” the amount paid for the securities must be paid within 30 days after the put option is exercised.⁷