Morgan Lewis on ESOPs
February 2005

In this Issue:

• Recent DOL Field Guidance and WorldCom Case Provide Comfort to Directed Trustees:
  In the last two months, there have been two important developments relating to the liability of directed trustees of ERISA plans, particularly in connection with purchases of publicly traded securities. In December 2004, the U.S. Department of Labor (DOL) issued Field Assistance Bulletin 2004-03 on the subject. Then, on February 1, 2005, a federal district court relied on that bulletin and prior case law to exonerate the directed trustee of WorldCom’s Section 401(k) plan. Both the field assistance bulletin and the WorldCom case make it clear that, even though a directed trustee is a fiduciary under ERISA, its fiduciary duties are quite limited, particularly when it comes to decisions about whether to invest in employer securities.
• Tax-Free Treatment Denied for Failure to Timely File 1042 Election:
  In the recently decided case of Estate of Clause v. Commissioner of Internal Revenue, the Tax Court denied tax-free treatment for a sale of stock to an ESOP, because the taxpayer failed to file a statement of election on a timely basis.
• Trustee Held Liable for Failing to Adequately Investigate Purchase of Employer Securities:
  In the recently decided case of Henry v. Champlain Enterprises, Inc., an independent ESOP trustee was held liable for $7.75 million in damages in connection with a purchase of employer securities.
• Calendar of Events
• Exempt Loan May Be Prepaid with Redemption Proceeds, Per IRS:
  The IRS has issued a private letter ruling stating that an ESOP may use the proceeds of a redemption of stock held in the ESOP’s suspense account to prepay an exempt loan. In its ruling, the IRS confirmed that this prepayment would not jeopardize the loan’s exemption from the prohibited-transaction rules.

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