IRS Says Employee 401(k) Contributions Can Be Used to Repay ESOP Loans

In Technical Advice Memorandum (TAM) 9503002, issued January 9, 1995, the IRS said that a plan that allows employees to use their 401(k) deferrals to repay an ESOP loan does not violate ERISA. The IRS reasoned that the employee contributions under 401(k) are legally treated the same as employer contributions, so it is acceptable to allow investments for this purpose. The ruling could be of considerable interest to public companies with combined 401(k)/ESOP plans. Already, companies that offer employees the option of investing in their own shares find that about 25% of the investments are used for that purpose, so these funds could make it easier for companies to repay ESOP loans.