Treasury Official Expresses Doubts About Floor-Price Protection in ESOPs

Citing possible fiduciary and tax concerns with floor-price protection in ESOP companies, William K. Bortz, associate benefits tax counsel at the Treasury Department's Office of Tax Policy, said that the practice raised unanswered questions. The value of ESOP shares often declines significantly following a leveraged transaction, and floor-price protection is designed to insulate the people who leave the company during that often-temporary depression in the stock price. The NCEO's 2010 survey on repurchase obligation practices found that fewer than 10% of ESOP companies offer floor-price protection, and another 21% will consider doing so.

Speaking at the ESOP Association's annual conference on May 13, Bortz noted that since floor-price protection is temporary, any benefit it provides one participant is offset by reduced benefits to other participants. Bortz called this situation "a zero-sum game" and suggested that it "presents fiduciary problems." Bortz also said the question of how floor-price protection should be viewed was unanswered, suggesting that it could be considered a participant benefit, an agreement with the ESOP, or a side agreement with the employer. He noted that which of these three views of floor-price protection prevailed would affect several aspects of ESOP taxation.