New US Senate Bills Would Encourage ESOPs

Senator Bill Cassidy, M.D. (R-LA), chair of the Senate Health, Education, Labor, and Pensions (HELP) Committee, just introduced two bills to encourage ESOPs.

The first, the Employee Ownership Representation Act (PDF), would add two new ESOP company board members to the Advisory Council on Employee Welfare and Pension Benefit Plans, also known as the ERISA Advisory Council. The council acts as an advisory group on ERISA issues, primarily for the Department of Labor. There are currently no seats specifically set aside on the council for ESOP company representatives.

The Employee Ownership Fairness Act (PDF) codifies and expands existing IRS private letter rulings that allow C corporation ESOPs to apply the Internal Revenue Code ("Code") Section 404 contribution limit separately for (1) employer contributions to repay ESOP loan principal and (2) employer contributions to other defined contribution plans or a nonleveraged component of an ESOP. The bill expands this principle by providing that that neither contributions to repay ESOP loan principal nor contributions of employer stock to the ESOP would even be taken into account for purposes of the contribution limit under Section 404. Also, the bill does not limit this to C corporations, so it would apply to S corporations as well.

That leaves Code Section 415, which limits annual additions to individual accounts under the plan. Under the Employee Ownership Fairness Act, neither contributions to repay the ESOP loan principal nor contributions of employer stock to the ESOP would be considered under Section 415, just as with the contribution limit under Section 404.

Finally, the Employee Ownership Fairness Act also would expand the existing ability under Code Section 415(c)(6) of C corporations with leveraged ESOPs not to count forfeitures toward annual additions under certain conditions. Under the bill, there is an unconditional provision, not limited to C corporations, that provides that "forfeitures allocated to accounts...shall not be taken into account as annual additions."

Currently, companies with leveraged ESOPs that might run up against contribution limits typically deal with the problem by extending the length of the internal loan so that annual allocations fall within the limits. In some companies with very generous plans, even doing this means that the entire contribution limit is allocated to the ESOP. That means that employees who want to get a tax deferral for contributing to a 401(k) plan the company sponsors may be unable to do so. Additionally, the company may have to deny matching contributions it otherwise would make. The Employee Ownership Fairness Act would address those issues, as it notes under Section 2, "Findings."

The bills have not yet been assigned numbers.