New Congress Faces Multiple Ownership Issues

President Bush is talking a lot about the "ownership society," although employee ownership is clearly not part of that vision. But employee ownership will be on the agenda for Congress in a number of probable new and revived bills.

On the equity front, advocates of narrowing the new equity compensation accounting rules are gearing up again to make their case that the SEC should limit the rules to the top five named officers in public companies and exclude private companies altogether. If that doesn't succeed, proponents might settle for a further delay in implementation of the rules pending an SEC study or limiting the rules to larger public companies. The new Senate lineup looks more promising for proponents, but the chairman and ranking minority member of the Senate Banking Committee, which would hear the bill, remain adamantly opposed. The House easily passed a bill last year, and presumably would again. But the Senate leadership would have to agree to move the bill directly to the floor in some way. Prospects remain doubtful, but not impossible.

In the defined contribution plan area, it is likely that efforts will be revived to reform 401(k) plans so that, among other things, employees will be able to diversify out of company stock sooner and companies will be able to provide employees with some form of investment advice about their plans more easily. Legislation to this effect has passed the House before, but died in the Senate, largely because prospects did not seem good that the two houses could agree on key elements of the bill, especially the investment advice section. ESOPs would be largely unaffected by the legislation, except for those in public companies that are part of 401(k) plans or that allow employee investment. Prospects for legislation remain very uncertain, in part because the same problems are likely to re-emerge and in part because congressional attention may be redirected to the president's proposals on Social Security reform and the creation of new retirement savings account plans.

In the ESOP area, proposals to give sellers to an ESOP in S corporations the ability to defer tax on the gain, improve tax treatment of ESOP dividends, repeal a 10% penalty tax on distributions of current earnings to participants in an S corporation, and other changes will be reintroduced. In the past, when there is a tax bill, ESOP advocates have often succeeded in getting part of this wish list included, but the legislation does not move on its own. The absence of action in ESOPs can also be a good thing. There are no indications that serious proposals will be made to limit ESOP tax benefits and, barring any scandals, none seem likely.