New Tax Bill Includes Significant Changes for Employee Ownership

The "Back to Small Business Job Protection Act" (the small business tax incentives feature of the Minimum Wage Bill) contains a number of provisions important to employee ownership. The bill has now been passed by the Congress and should be signed in the next few weeks by the President. Note on August 28: The bill was signed into law on August 20; also, this column has been revised to better and more accurately describe the legislation and its implications for employee ownership.

There are three areas of significant change:

• Changes in ESOP law: S corporations will now be able to have ESOPs and other qualified plans as stock owners, although restrictions on ESOPs will provide them with fewer tax benefits than C corporations. The bill also eliminates section 133 of the Internal Revenue Code, the provision of the law allowing lenders to deduct 50% of the interest income they receive on ESOP loans provided certain requirements are met.
• Simplification of various plan rules, including the definition of highly compensated employees and the anti-discrimination provisions for 401(k) plans.
• Elimination of certain restrictions on how much can be contributed to qualified plans, including the repeal of family aggregation rules; allowing pretax employee deferrals to 401(k) and cafeteria plans to be included in calculating eligible pay for annual addition limitations; and the removal of the requirement to aggregate defined benefit and defined contribution plans when testing for annual contribution limits.