How can employees invest in an S Corporation structure?

One selectively used feature of S Corporation ESOPs (and C Corporations) is the ability that employees have, on a fully discretionary and voluntary basis, to “roll-over” a prudent percentage of their defined contribution plan assets (usually 401(k) assets) on a tax-free basis into an ESOP. In companies with a large payroll base, these 401(k) asset “roll-overs” can provide a necessary layer of equity to enable employees to buy companies.

We should reinforce that any use of 401(k) roll-over assets in these cases, should that structural feature be deemed useful at all, would be entirely discretionary on the part of individual employees. No employer, investor group or union organization, including The Portland Newspaper Guild-CWA, can or should compel individuals to make that particular investment decision with their personal funds. Regardless, in most all cases, employee equity “roll-overs” from 401(k) funds will not provide sufficient financing to acquire large corporations. Other “deep pocketed” investment sources will almost always be required to consummate an ESOP purchase of a corporation.