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The Employee Ownership Update

Corey Rosen

April 12, 2002

(Corey Rosen)

House Approves Retirement Plan Reforms: Bill Follows Lines of Bush Proposal, ESOPs Largely Unaffected

On a 255 to 163 vote, the House passed H.R. 3762, the Pension Security Act. The bill follows the general outlines of President's Bush's proposal for retirement plan reform, but adds some significant new initiatives. On a 223-187 vote, the House rejected an amendment in the nature of a substitute offered by Congressman George Miller (D-CA) that closely paralleled the bill that passed the Senate Health, Education, Labor, and Pension Committee's bill. The vote followed party lines closely, although 22 Democrats did vote against it. The Senate Bill, detailed in my column of March 21, has much stricter provisions than the House bill.

The key provisions of the House bill, as they might apply to ESOPs, are described below:

Impact on ESOPs and Employee Ownership in 401(k) Plans

The bill should have very little if any impact on all but a handful of ESOPs, and those only in public companies where the ESOP is combined with a 401(k) plan. Private companies with employer stock in 401(k) plans are also unaffected by the new diversification rules. Public companies 401(k) plans and combined ESOP/401(k) plans will have to offer diversification, but the provisions allow enough flexibility that it is unlikely that companies will find these new rules a significant disincentive to match in employer stock. The relaxed coverage rules will have little impact on ESOPs as almost all ESOPs go beyond minimum coverage rules voluntarily.


The addition of the provision allowing employers to avoid fiduciary obligations when using plan administrators to provide investment advice to employees caused the bill to lose its key Democratic sponsor, Benjamin Cardin (D-MD). The largely party-line vote in the House augurs a similar partisan battle in the Senate, where the Democrats' slim majority will probably produce a stronger version of the legislation. The relaxed coverage requirements also will be a lightning rod for Democratic criticism. It is entirely possible that the entire matter will be put off till next year if members of Congress on both sides decide they would prefer to use it as an election issue or if the two Houses cannot agree on a compromise. Despite all this, reform this year is still a real possibility.

House Passed Retirement Reform Bill Precludes IRS Withholding Rules

The retirement reform bill passed by the House includes a provision that prohibits the IRS from imposing planned withholding requirements for ISOs and ESPPs. The IRS has proposed regulations, effective 2003, that would require employers to withhold payroll (but not income) taxes on stock option exercises or purchases under incentive stock option (ISO) plans or employee stock purchase plans (ESPPs). Employer groups have argued the withholding would be at best very burdensome and at worst impractical. They have also noted that the tax would be imposed even though employees might later sell the stock at a loss or might exercise their options when no longer on the payroll. Some employers have said they might stop offering some of these plans if they had to withhold.

Prospects for the provision remain uncertain, especially given its $20 billion price tag. The strong support, however, suggests passage is a possibility.

Bush Opposes McCain-Levin Stock Option Accounting Bill

President Bush told the Wall Street Journal (4/9/02) that he opposes proposals to prevent companies from taking a tax deduction for stock options they have not previously charged to earnings on their income statements. Bush said he favored fuller disclosure of options instead, including requiring companies to report exercised options when they calculate earnings per share.

Author biography and other columns in this series

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