ESOP Legislative Update

While Congress has shown a propensity to move very quickly on options legislation (witness the Boehner bill and the rapid passage of legislation to exempt options pay from overtime compensation rules), it is moving more deliberately on ESOPs. The major issue now before Congress is reform of ESOP S Corporation rules. ESOPs in S corporations do not have to pay unrelated business income tax (UBIT) on their pro-rata share of the company's earnings. All other tax-exempt trusts do have to pay their share of taxes. The Administration has proposed limiting this exemption to ESOPs in which not more than 10% of the allocations in the plan go to people with more than 2% ownership or who are highly compensated. This strict definition would rule out almost every ESOP, however. Congressional ESOP advocates have favored a less restrictive approach. Conversations are now going on between the two sides and ESOP advocates to try to find a middle ground.

Meanwhile, proposals are ready to allow employees to reinvest ESOP dividends back into the ESOP on a pre-tax basis. While the proposals have received broad bipartisan support, they will need to be attached to a larger tax bill or retirement plan reform bill, prospects for which are uncertain.