April 16, 2019

IRS "Issue Snapshot" on ESOP Code Section 409(p) Regulation Released

Executive Director

In April, the IRS released an "issue snapshot" on how to prevent violations of Code Section 409(p), the part of the Internal Revenue Code designed to prevent the benefits of an ESOP in an S corporation from being too highly concentrated. The issue snapshot provides no new guidance but does provide an easy-to-follow explanation of Chief Counsel Advice (CCA) Memorandum 201747007 (September 14, 2017), which set out the IRS position on various ways to prevent a nonallocation year in an S corporation ESOP from occurring, such as transferring stock out of accounts of participants who might otherwise be deemed disqualified or excluding allocations to certain highly compensated employees. If a company allocates shares to participants who fall under the definition of a disqualified participant, the law deems this a nonallocation year, and the tax penalties for this are draconian.