Ways and Means Majority Supports ESOP S Corporation Benefits

A majority of the members of the House Ways and Means Committee have written a letter to the committee's chair and ranking minority member opposing President Clinton's budget proposal to eliminate the UBIT exemption for ESOPs in S corporations. Under a 1997 law, ESOPs do not pay tax on any earnings of an S corporation attributed to their share of ownership. The President has proposed eliminating this benefit.

The 21 members, who came from both parties and include most of the committee's subcommittee chairs, said that the incentives have "been creating effective retirement savings opportunities for their employee owners." They agreed, however, that "certain inappropriate arrangements" may have misapplied S corporation incentives. They said they were working with ESOP advocates to find a solution to the potential abuses.

Meanwhile, Senators John Breaux (R-LA) and Orrin Hatch (R-UT) wrote to Robert Rubin expressing their support for S Corporation ESOP rules. In response, Donald Lubick from the Treasury Department said that the Administration believes that ESOPs should pay taxes in S corporations as any other owner would. He also said that the Department had a considerable amount of marketing material promoting arrangements that would provide little long-term benefit to rank-and-file employees.

The Congressional letters make passage of the Clinton proposal extremely unlikely, though not impossible. Chances for legislation addressing the abuses of the law, however, look better. The most common proposed abuse is for companies to set up tiered ownership arrangements where an S corporation owned by just a few people sets up an ESOP for these individuals, but also owns subsidiaries whose employees do not participate in the ESOP. S corporation ESOPs have also been proposed for very small companies with just a few (often professional) employees. The Committee to Preserve Private Employee Ownership, a principal lobbying group on the issue, is working to develop a legislative solution to the abusive application of the law.