The Road Ahead for S Corporation ESOPs

With the new tax law making it possible for S corporations to have ESOPs as owners, many C corporations with ESOPs are considering switching to S status.

But Will the S Corporation Tax Benefit Last?

Many would argue that Congress did intend to provide an incentive for S corporations to set up ESOPs, but did not intend to provide an incentive for C corporations with ESOPs to switch to S. The tax cost of this oversight could be substantial.

Farnum Redux

Several years ago, the Department of Labor initiated a legal action against Wardwell Braiding Company (the so-called "Farnum" case) accusing the ESOP of overpaying for the shares.

Inc. 500 Companies Share Ownership

According to a survey of the Inc. magazine 500, the fastest-growing 500 closely held companies in the U.S., sharing ownership is an important part of this entrepreneurial group's culture. Twenty-eight percent offer an ESOP and 26% offer stock options to all full-time employees.

Subchapter S Reform

The Act corrects a number of defects in the 1996 tax act's provisions concerning subchapter S corporations and ESOPs. The previous law allowed employee benefit plan trusts to hold stock in an S corporation starting in 1998, but, as structured, made it impractical to do so.

ESOP Estate Tax Bill Passed

Congress sometimes passes legislation that appears to be general in scope, but really is meant mostly for a single company.

401(k) Diversification Rules Passed

The Act includes language that prohibits sponsors of 401(k) plans from requiring employees to invest in employer stock if the employee deferral part of the plan is 10% or more invested in company stock. The employer contribution part can be entirely in stock, however.

Subchapter S Reform

Both the House and Senate versions of the Revenue Reconciliation Act of 1997 contain provisions affecting employee ownership law.