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The Employee Ownership Update

Corey Rosen

February 13, 2002

(Corey Rosen)

New Data Show That ESOPs and 401(k) Plans Heavily Invested in Company Stock Are More Likely to Have Other Retirement Plans as Well

According to testimony by Doug Kruse of Rutgers University before the House Subcommittee on Employer-Employee Relations of the Committee on Education and the Workforce (2/12/02), "about 70-75% of participants in plans that are heavily invested in employer stock [ESOPs, 401(k) plans, and profit sharing plans] are in companies that also maintain diversified pension [or other retirement] plans, indicating that such plans tend to supplement rather than substitute for diversified plans. Among participants in large ESOPs (over 100 employees), 66.2% are in companies also sponsoring defined benefit plans, 34.7% are in companies also sponsoring diversified defined contribution plans, and 75% are in companies that sponsor either of these diversified plans. The numbers are similar for non-ESOP plans that invest more than 10% of assets in employer stock, with 70% of participants in companies also sponsoring either type of diversified plan. While exactly comparable numbers for the full workforce are not comparable, employer survey data from the Bureau of Labor Statistics shows that 32% of all private-sector employees, and 50% of employees in medium and large establishments, participate in defined benefit pension plans. Therefore, it appears that participants in ESOPs and other plans heavily invested in employer stock are more likely than other employees to also be covered by defined benefit pension plans."

The new Kruse data supplement previous findings by Kruse and his Rutgers colleague Joseph Blasi that private companies with ESOPs are four to five times as likely as comparable non-ESOP companies to have other retirement plans.

Levin and McCain Plan to Introduce Bill to Require Option Expensing

Senators Carl Levin (D-MI) and John McCain (R-AZ) are introducing legislation that would prevent companies that do not record the present value cost of stock options as a charge to earnings from taking a tax deduction for the spread on the exercise of non-qualified options or disqualifying exercises of incentive stock options. Currently, the accounting charge only appears in financial footnotes. Senator Levin introduced similar legislation in 1998, but it was never seriously considered. In the wake of Enron accounting controversies, there is now more support for more disclosure of corporate costs in general. Still, the legislation will face stiff opposition from industry groups and practical questions about how to account for options.

Foreign Subsidiary Participation in an ESOP Does Not Disqualify ESOP

In PLR 200205050, the IRS ruled that participation by employees of a foreign subsidiary in a U.S. company's ESOP did not disqualify the ESOP. It is common in ESOPs to exclude employees with no W-2 income, or non-resident aliens with no U.S. source income. If that were the case, participation by foreign employees would be a plan violation. If these employees are not excluded, however, and the subsidiary is a member of a control group, then they can be included.

Non-ESOP Plan Data Subject to Discovery

Plaintiffs can have access to data on executive, officer, and board compensation; board minutes relating to the creation of an ESOP and other business plans; plan fiduciary meeting minutes; and data on other retirement plans, if these data are relevant to claims that the ESOP overpaid for stock. The decision came in Beauchem v. Rockford Products Corp. (N.D. Ill., No. 1, C 50134, 1/24/02). Beauchem is charging that the ESOP at Rockford Products overpaid for the shares, that the company both took actions to conceal the overcharge and failed to restore plan losses.

Author biography and other columns in this series

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