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Alternative Employee Ownership Structures

An NCEO Issue Brief

by Christopher T. Horner II, Cynthia A. Moore, and Corey Rosen

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Much has been written about the most common forms of sharing ownership widely with employees (ESOPs, stock and stock rights grants, qualified stock purchase plans, and 401(k) plans with company stock as an investment or matching option). But there are other ways that companies can share ownership widely with employees that get less media and professional attention. This publication looks at a number of alternative structures, including nonqualified broad-based stock purchase plans, profit sharing plans invested substantially in employer stock, internal stock markets, and what we call "legacy plans"—plans that have unique structures set up specifically for that company. We also discuss worker cooperatives.

Publication Details

Format: PDF, 32 pages
Edition: 1st (August 2014)
Status: Available for electronic delivery

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  Conventional Forms of Ownership Sharing
  Alternative Plans Discussed Here
Nonqualified Stock Purchase Plans
  Journal Communications
  Robert W. Baird
  SpawGlass Holdings
  Chain Store
  The Sky Factory
  Chroma Technology
Internal Markets
  TEOCO: Simplifying the Internal Market
Legacy Plans
  American Cast Iron Pipe Company
Worker Cooperatives
  South Mountain
  Namasté Solar
Profit Sharing and Stock Bonus Plans
  Companies Using Profit Sharing Plans
Profit Sharing Plans as an Alternative to ESOPs
  Deductible Contributions
  Deductible Dividends
  Section 1042: Deferral of Recognition of Long-Term Capital Gain
  Unrelated Business Income Tax
  Federal Taxation of Benefit Distributions and Net Unrealized Appreciation
  Prohibited Transactions and Exemptions
  Voting of Employer Securities
About the Authors


From "Nonqualified Stock Purchase Plans"

In many cases, the sale of the Texas construction company might have been structured as an ESOP, but in this case, the French owners wanted to limit their liability going forward through a simple deal that could get them out of the business quickly. In May 1993, a deal was finalized in which 51% of the Texas-based company was sold to 10 managers. The multinational retained the rest of the company. Over time the number of owners grew. The company, which remains private, is now 100% employee-owned and has 300 shareholders, 60% of its work force. SpawGlass employs over 500 people. It provides construction management design-build, and civil contractor services. The firm is annually ranked among Texas' top workplaces. Its client base includes healthcare, oil and gas, public works, commercial, senior living, student housing, higher education, civil construction as well as other facility types.

The road from management ownership to broad-based ownership happened in stages. Taylor, who became chairman and CEO of SpawGlass, told the NCEO that the managers who owned the stock decided to cultivate an ownership culture first. So they went to NCEO and Great Game of Business seminars. They started using open-book management and educating employees about how the business worked. And they added shares to their existing bonus plan. That first year, salaried employees received 20 shares as part of their annual bonuses and gained the right to buy shares in the company through payroll deductions. The employees had the right to sell the bonus related shares back to the company immediately, but most didn't. That year, the number of shareholders jumped to the high 30s.

From "Profit Sharing Plans as an Alternative to ESOPs" (footnotes omitted)

The Code requires that all defined contribution plans, including ESOPs and profit sharing plans, must provide for a valuation of investments held by the trust, at least once a year, on a specified date, in accordance with a method consistently followed and uniformly applied. Moreover, the Code provides that an ESOP is not a qualified plan unless all valuations of employer securities that are not readily tradeable on an established securities market, with respect to activities carried on by the ESOP, are performed by an independent appraiser. A valuation by an independent appraiser is not required in the case of employer securities that are readily tradeable on an established securities market.

Although profit sharing plans are not required to obtain an annual valuation by an independent appraiser, a profit sharing plan must value non-publicly traded employer securities on an annual basis to comply with its obligations under both ERISA and the Code. Form 5500 must reflect the "current value" of all plan assets, including employer securities, as of the first and last day of the plan year and must also reflect unrealized appreciation and depreciation of plan assets. "Current value" means the fair market value where available. Otherwise, it means the fair value as determined in good faith by a trustee or a named fiduciary, assuming an orderly liquidation at the time of the determination. Furthermore, an accurate assessment of fair market value is essential for a plan's ability to comply with certain requirements in the Code, such as the exclusive benefit rule of Section 401(a)(2), the annual limit on contributions under Code Section 415, and the deduction rules under Code Section 404. Finally, the valuation of a profit sharing plan's assets will determine the value of a participant's account and, ultimately, the amount of his or her distribution.