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The Employee Ownership Update

Corey Rosen

July 3, 1997

(Corey Rosen)

Subchapter S Reform

Both the House and Senate versions of the Revenue Reconciliation Act of 1997 contain provisions affecting employee ownership law. The most important of these makes employee stock ownership plans (ESOPs) more practical in S corporations, but other provisions affect 401(k) plans, ESOP estate planning issues, and stock option plans.

ESOP Estate Taxes

Congress sometimes passes legislation that appears to be general in scope, but really is meant mostly for a single company. In this case, the House passed a provision allowing an ESOP to act as a charitable trust for an estate, provided the plan was in existence August 1, 1996, the decedent and members of the decedent's family own not more than 10% of the value of the company stock, and the ESOP owns at least 60% of the stock after the transfer. There are additional restrictions as well, including full voting rights for participants and an independent trustee. The provision was initiated by the Sammons Company, a Texas-based company with an ESOP. It is not included in the Senate version, and, if passed, is unlikely to be used much, if at all, beyond this one case.

401(k) Plans and Employee Ownership

The House version includes a provision that prevents employers who sponsor 401(k) plans from requiring employees to invest their elective deferrals in company stock if the plan has 10% or more of its total assets in company stock. Employees could voluntarily choose to invest in company stock, however, if there are other choices.

Stock Options

A "Sense of the Senate" resolution in the Senate version called for hearings on whether companies should be allowed to deduct the spread on stock options when they are exercised if the company does not account for stock option costs on its income statement.

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