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The Employee Ownership Update

Corey Rosen

May 24, 2000

(Corey Rosen)

House Subcommittee Approves "Super Stock Option" Bill

The Employer-Employee Relations Subcommittee of the House Committee on Education and the Workforce approved by voice vote HR 3462, the "Wealth Through the Workplace Act." The bill, introduced by John Boehner (R-OH) with bipartisan support, would create a new type of stock option that would combine the tax deductibility of the spread on stock option exercise that applies to non-qualified options with the capital gains tax treatment of incentive stock options. In order to be eligible, a plan would have to offer options to at least half the full-time workforce that had worked for at least two years. Options would have to be granted at 85% or more of fair market value and could not be substituted for other compensation. Workers exercising the options would not have to pay tax on exercise, and, if they hold the shares for a year, would pay capital gains tax on sale.

The bill now moves to full committee, where prospects look encouraging for quick action.

ESOP Legislative Update

While Congress has shown a propensity to move very quickly on options legislation (witness the Boehner bill and the rapid passage of legislation to exempt options pay from overtime compensation rules), it is moving more deliberately on ESOPs. The major issue now before Congress is reform of ESOP S Corporation rules. ESOPs in S corporations do not have to pay unrelated business income tax (UBIT) on their pro-rata share of the company's earnings. All other tax-exempt trusts do have to pay their share of taxes. The Administration has proposed limiting this exemption to ESOPs in which not more than 10% of the allocations in the plan go to people with more than 2% ownership or who are highly compensated. This strict definition would rule out almost every ESOP, however. Congressional ESOP advocates have favored a less restrictive approach. Conversations are now going on between the two sides and ESOP advocates to try to find a middle ground.

Meanwhile, proposals are ready to allow employees to reinvest ESOP dividends back into the ESOP on a pre-tax basis. While the proposals have received broad bipartisan support, they will need to be attached to a larger tax bill or retirement plan reform bill, prospects for which are uncertain.

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