Tax Bill Contains Important Employee Ownership Provisions

Aside from the Subchapter S and section 133 provisions of H.R. 3448 described in the last update, the small business tax relief bill working its way through Congress contains other important provisions affecting employee ownership as well.

As part of efforts to simplify rules, five-year averaging for lump-sum distributions would be repealed, the limits on company contributions to both a defined contribution plan (such as an ESOP) and defined benefit pension plan would be phased out, and "highly compensated employee" would be redefined as a 5% owner or an $80,000 per year employee (an amount to be indexed for inflation). Current rules defining highly compensated employees are very complicated.

More important are changes in 401(k) plan nondiscrimination testing rules. New alternative tests would allow plans to qualify, for instance, if all eligible participants got at least a 3% of pay corporate contribution, even if they made no salary deferrals to the 401(k). Alternatively, a plan would pass if 100% of elective contributions for all employees were matched up to 3%, or a 50% match was provided on deferrals of 3% to 5%, and highly compensated employees received a percentage match no higher than non-highly compensated employees. The changes could encourage ESOP/401(k) plans, with companies using the ESOP to provide the minimum match.

These provisions are likely to survive a House-Senate conference and become law if the minimum wage bill becomes law.