United States

Who owns your corporate stock?

Reminder for closely-held stock owned by retirement plans


Qualified retirement plans are subject to oversight by both the U.S. Department of Labor (DOL) and the Internal Revenue Service (IRS), and as such, are subject to investigations by the DOL or examinations by the IRS. One issue that can fall through the cracks in the administration of qualified plans that own stock of the closely-held corporation that sponsors the plan is the proper maintenance of corporate stock records.

Unlike publicly traded companies, closely-held corporations do not typically use the services of a stock transfer company. Instead, the stock record book is maintained internally and often only updated once a year after the close of the year. That practice while not ideal, is likely sufficient in most cases. However, in the case of a qualified retirement plan that holds employer securities, both the plan sponsor and the plan trustee need to concurrently and contemporaneously record any changes in the number of shares owned by the plan. The Employee Retirement Income Security Act (ERISA), as well as the Internal Revenue Code, generally require plan assets to be held in trust. When a plan owns employer securities, both the IRS and DOL upon examination or investigation will consider the failure to maintain corporate records that match the plan records a violation of their respective requirements.

Two situations often arise in qualified plans that would cause changes to the corporation’s stock ownership records. The first is any ownership change activity during the year. When qualified plans own stock of the sponsoring corporation, contributions, redemptions and distributions of shares to or from the plan will cause the plan’s overall ownership of corporate shares to change. The corporation should make sure the stock certificates and record book accurately reflect the current ownership at all times throughout the year. Second, it is not uncommon for the named trustee of the qualified plan to change, especially if the trustee is a corporate officer or other individual that will naturally change over time. If the stock certificate or corporate record book show the name of the individual trustee in addition to the plan name, the trustee name should be updated in the corporate stock records concurrently with any changes to that position.

From an IRS perspective, maintaining plan assets in trust is a fundamental qualification issue. The DOL for its part, views the trust requirement as a fundamental duty of the plan fiduciaries, and the DOL in particular focuses on this issue if it selects a plan for investigation. Therefore, corporations that sponsor retirement plans that hold corporate stock should implement processes to keep the corporate stock records up-to-date and to issue and re-issue stock certificates throughout the year as stock ownership changes. A sound internal process that prevents these changes from being overlooked will prevent this Code and ERISA violation.


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