NESTEG Bill Allows S ESOPs to Use All Distributions to Pay for Loans

In September, the Senate Finance Committee passed the National Employee Savings and Trust Equity Guarantee Act, a broad retirement plan reform bill that contains many of the same provisions passed the year before to address post-Enron concerns about diversification of employee stock in 401(k) plans. The bill also contains a provision that would allow S corporation ESOPs to use all distributions on trust-held shares (not just the unallocated shares-those that have not yet been paid for) to repay an ESOP loan. The change would create a parallel treatment between S corporation ESOPs and C corporation ESOPs that use dividends to repay loans. While the bill has bipartisan support in the Senate, it has not yet made it to the floor, and the House has no comparable legislation to date. Congress will adjourn this year without passing the bill; the outlook for next year is very uncertain as momentum for retirement reform wanes.