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The Employee Ownership Update

Corey Rosen

August 8, 1995

(Corey Rosen)

IRS Ruling on Voting Rights

Within the next few weeks, the IRS will issue a revenue ruling indicating that trustees can vote shares for which ESOP participants do not provide directions. Under current law, employees must be able to direct the trustee as to the voting of shares allocated to their ESOP accounts on all issues in public companies and on limited issues in private companies. Companies can voluntarily provide for additional voting rights.

Under old regulations for tax credit employee stock ownership plans (TRASOPs), shares for which no directions were received could not be voted by the trustee. In practice in non-TRASOP plans, however, trustees often could do this. In the recent ruling in Polaroid case, a court ruled that the trustee must make an independent decision for these undirected shares, even if the plan document directs the trustee to vote them according to the way allocated shares were voted.

In the new ruling, the IRS says that trustees can in fact vote the undirected shares.

IRS Looking into Tax Status of COLI

The IRS is looking into the tax status of corporate owned life insurance (COLI), which many employee ownership companies now use to handle repurchase liability. With COLI, a company buys life insurance on a large percentage of its covered employees, using the build-up in value to help fund its repurchase obligation. One tax wrinkle of the plan allows a company to borrow against this value (up to $50,000), deducting the interest. The IRS is now looking into whether this tax advantage should be sustained. COLI has periodically come under congressional or IRS scrutiny, but, so far, has withstood challenges.

USAir, Unions Give Up on Concessions

Efforts to trade concessions for ownership at USAir have broken off. Both sides say they are too far apart to reach agreement and will not revisit the issue until contracts expire in 1997.

Another Estimate on 401(k) Employee Ownership

A new study estimates the amount of employer stock held in 401(k) plans to be higher than previously reported. The Institute of Management and Administration, an organization specializing in defined contribution plan administration, reported in its May 1995 newsletter on a study of 401(k) plan sponsors with over $200 million in plan assets. Based on 1995 data from 355 firms, it found that 70% offer company stock as an investment option and that employees have more than $255 billion invested in company stock in these plans. This number appears to include employer matches. It constitutes 41% of the total holdings in these plans. This number is considerably higher than estimates provided by Douglas Kruse of Rutgers, who relied on 1992 Department of Labor reports. The IOMA data suggest total employee holdings through 401(k) plans may well exceed $350 billion in employer stock, over three times the 1992 totals Kruse reported. For the year before the survey, the employer stock investment slightly underperformed the S&P, although its risk-adjusted return would be lower.

High-Ranking Chinese Delegation Meets with U.S. Employee Ownership Experts

Leaders of the Chinese State Commission on Economic Restructuring recently completed a three-week tour of the U.S., including meetings with U.S. employee ownership experts. The delegation told Corey Rosen, NCEO's director, that they were very intrigued by the idea of employee ownership and wanted to investigate it further. According to recent reports, the Chinese government has recently eliminated its previous strict limitations on how much stock employees could own in state-owned enterprises that are partially privatized. While a final plan for economic transformation at the central government level is still to be decided, local and provisional governments are moving forward with enterprises they own, and in some cases are encouraging substantial employee ownership.

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