The Employee Ownership Update
May 10, 2002
Bipartisan Senate Retirement Reform Bill Introduced
A bipartisan group of moderate Democratic and Republican Senators has introduced S. 2190, the "Worker Investment and Retirement Education Act." Introduced by John Kerry (D-MA), Olympia Snowe (R-MA), Lincoln Chaffee (R-RI), and Dianne Feinstein (D-CA), the bill would require personalized investment statements for employees. In 401(k) plans and public company KSOPs or ESOPs that allow employee stock purchases, diversification is required as follows:
- Fifty percent of employer matching contributions of company stock could be diversified after three years of plan participation and 100% of all employer stock contributions after five years could be diversified. Public company stand-alone ESOPs are not affected by this portion of the bill.
- Half of non-matching employer stock contributions could be diversified after five years and 100% after seven years, including in covered ESOPs and 401(k) plans.
- All voluntary employee deferrals used to buy stock in any covered plan could be diversified at any time, except in stand-alone ESOPs. In that case, employees must be able to diversify at least half of the stock acquired with their deferrals after five years and 100% after seven.
- All stock can be diversified for workers over 55 in all covered plans.
- Employees cannot be compelled to invest in company stock, except in stand-alone ESOPs (subject to the diversification rules above).
The sponsors are members of the Senate Finance Committee, but the committee is more likely to consider a bipartisan bill now being worked on by Max Baucus (D-MT) and Charles Grassley (R-IA), the chair and ranking Republican.
Treasury Indicates Willingness to Change Tax Withholding Rules on Options and ESPPs
Pamela Olson, acting assistant Treasury secretary for tax policy, said that the Administration would be willing to consider delaying proposed IRS regulations that would impose payroll tax withholding on incentive stock options and employee stock purchase plans if they are too burdensome. It also would not oppose legislation to change the rules. The House has passed legislation preventing the implementation of the new withholding requirements; the Senate has yet to consider the proposal.
Mentor Graphics Ups Prospects for New Rules on Shareholder Aproval of Option Plans
Shareholders of Mentor Graphics have voted to require the company to get approval of stock option plans. Mentor granted seven percent of its outstanding shares in options in 2000. The vote may send a signal to the NASDAQ and New York Stock Exchange, which are currently considering whether to institute tougher requirements for shareholder approval of option plans.
IRS Clarifies That Distributions to Participants in S Corporations Can Only Be Based on Account Balances, Not Compensation; Allows Accounts for Terminated Employees to Be Held in Non-Stock Investments
In a Technical Assistance Memorandum dated November 5, 2001 and recently released, the IRS ruled that distributions on ESOP stock in an S corporation ESOP must be based on account balances, not compensation. The IRS argued that distribution of capital is a right that "adheres to the stock." On a second issue, the IRS ruled that the company could hold the account balances of former employees in investments other than company stock until paid out. However, the IRS did not allow the company to permit employees with account balances of $150,000 or more to direct the investments in these accounts. The company had withdrawn that provision in the course of negotiations with the IRS on this issue.
Many Employers Loosening Company Stock Rules in 401(k) Plans, But Workers Not Responding
A new survey from Hewitt Associates, Hot Topics in 401(k) Plans, indicates that that 38% of 300 large public companies surveyed use company stock as a match to 401(k) deferrals, and 86% restrict diversification of those contributions. But 62% of those with restrictions either have already loosened them or are considering doing so. The study can be found at www.hewitt.com. That may not make much difference, according to a new study by the Boston Research Group of 100 employees with company stock in their 401(k) plans. The average employee stock holdings of the group was 30% of total assets; a third of the employees were more than 50% invested in company stock. Only 12% of the group had reduced their investment in company stock since Enron, and only 25% said they were less comfortable with company stock post-Enron. Two-thirds said that 15% or more was a prudent investment in company stock in their plans, and 50% said 25% or more was.
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