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The Employee Ownership Update

Corey Rosen

January 29, 1997

(Corey Rosen)

Legislation on Stock Options Proposed

The Senate Democratic leadership has introduced legislation that would affect employee ownership. The "Targeted Investment Incentive and Economic Growth Act of 1997," introduced by Minority Leader Tom Daschle (D-SD), would create "performance stock options (PSOs)." PSOs would combine the best features of an incentive stock option (ISO) and nonqualified stock option (NSO), provided the PSOs were focused on non-highly compensated employees.

PSOs would provide that the spread between the exercise and grant price of an option would not be taxable until the stock purchased was sold. The grant price is the price at which an employee is given the right to purchase shares; the exercise price is the price at which they are actually bought. In an NSO, the spread is tax-deductible to the employer, but taxable as ordinary income to the employee when the option is exercised, even if the stock is not sold till later. In an ISO, the employee can pay capital gains tax on the spread and not pay that till the stock is sold, but the employer cannot take a tax deduction. In a PSO, the spread is deductible, but the employees does not have to pay tax until the stock is sold. Moreover, if the employee holds the stock two years or more, 50% of the gain is excluded from tax. Employers could deduct the spread on the exercise of the option, however. To qualify, the holder of the PSO would have to be a non-highly compensated employee or at least 50% of the value of the PSOs would have to go to non-highly compensated employees. A number of additional restrictions apply as well, mostly very similar to existing rules for ISOs. The bill also specifically excludes beneficiaries of such options from taking advantage of the tax-deferred rollover provisions of sales to qualifying employee stock ownership plans (ESOPs).

Boxer 401(k) Bill Modified

Senator Barbara Boxer (D-CA) has modified her proposal to limit employer stock in 401(k) plans. Previously, her bill would have limited both employer contributions and employee deferrals into 401(k) plans that were held in company stock to 10% of the total asset value unless employees had the right to change the investments. Her new bill (S. 14), would only prohibit employers from restricting employee deferral investments to company stock or property when 10% or more of the asset value of all individual account plans is in company stock or property.

Many people in the retirement plan community were concerned with Boxer's original bill, contending that it unnecessarily restricted employers from putting employer contributions into 401(k) plans in the form of employer stock. Some companies, they contended, would lower their matches in a 401(k) plan if they had to allow employees to sell the stock and invest in other things once it was contributed. The new legislation eliminates any restrictions on employer contributions.

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