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The Employee Ownership Update

Corey Rosen

May 11, 1999

(Corey Rosen)

Ways and Means Majority Supports ESOP S Corporation Benefits

A majority of the members of the House Ways and Means Committee have written a letter to the committee's chair and ranking minority member opposing President Clinton's budget proposal to eliminate the UBIT exemption for ESOPs in S corporations. Under a 1997 law, ESOPs do not pay tax on any earnings of an S corporation attributed to their share of ownership. The President has proposed eliminating this benefit.

The 21 members, who came from both parties and include most of the committee's subcommittee chairs, said that the incentives have "been creating effective retirement savings opportunities for their employee owners." They agreed, however, that "certain inappropriate arrangements" may have misapplied S corporation incentives. They said they were working with ESOP advocates to find a solution to the potential abuses.

Meanwhile, Senators John Breaux (R-LA) and Orrin Hatch (R-UT) wrote to Robert Rubin expressing their support for S Corporation ESOP rules. In response, Donald Lubick from the Treasury Department said that the Administration believes that ESOPs should pay taxes in S corporations as any other owner would. He also said that the Department had a considerable amount of marketing material promoting arrangements that would provide little long-term benefit to rank-and-file employees.

The Congressional letters make passage of the Clinton proposal extremely unlikely, though not impossible. Chances for legislation addressing the abuses of the law, however, look better. The most common proposed abuse is for companies to set up tiered ownership arrangements where an S corporation owned by just a few people sets up an ESOP for these individuals, but also owns subsidiaries whose employees do not participate in the ESOP. S corporation ESOPs have also been proposed for very small companies with just a few (often professional) employees. The Committee to Preserve Private Employee Ownership, a principal lobbying group on the issue, is working to develop a legislative solution to the abusive application of the law.

Capital Ownership Group Receives Ford Grant

The Capital Ownership Group (COG) has received a $100,000 grant from the Ford Foundation to create an international network of individuals and organizations interested in proposing and commenting on policy ideas to promote employee ownership. To enter the discussion, email Deborah Groban Olson at oeoc@kent.edu and indicate that you would like to participate in the COG effort on one of the following five topics:

COG was initiated by Deborah Groban Olson, the NCEO's chair, at an NCEO board meeting in 1997; the NCEO helped to initiate COG, but COG now functions as an independent entity.

New UK Ownership Plan Proposed

The Labour Government in the United Kingdom has proposed new legislation to encourage employee ownership. It would replace the existing "Save as You Earn" plan, a highly tax-advantaged savings/stock purchase plan. The new plan would be based on a trust similar to a U.S. 401(k) plan. Employers could contribute up to 3,000 per year in shares per employee, partly on a discretionary basis and partly according to a formula. In addition, employees could put up to 1,500 per year on a pretax basis into the plan to buy shares, which the employer could match at up to two shares for each share purchased. Employer contributions are deductible. If employees hold on to the shares for at least three years after they are acquired, they can avoid tax altogether for the shares donated outright by employers or pay only limited tax on shares they purchased or received through an employee match.

An additional proposal allows very small companies to provide stock to employees on a very favorable basis, with much more discretion about who gets stock.

While employee ownership supporters are heartened by the government's interest in promoting broader ownership, they are reluctant to give up the very popular SAYE plans. The government's concern with these plans, however, has been that they do not provide an adequate structure to encourage the long-term holding of shares.

Author biography and other columns in this series

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