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The Employee Ownership Update

Corey Rosen

July 12, 2002

(Corey Rosen)

Finance Committee Passes Pension Reform Bill; ESOPs Not Significantly Affected

The Senate Finance Committee has passed its own version of the "Pension Reform Bill." The bipartisan effort now will have to be melded with a pension reform bill passed by the Senate Health, Education, Labor, and Pensions Committee (HELP). The HELP bill is much stronger than the Finance Committee bill (for a summary, see my March 13 column), so the task will not be easy. If a bill passes the Senate, it would go to a Senate-House conference committee with the House passed bill. Given that fewer than 30 legislative days remain this Congress, observers now doubt any bill will be enacted this year.

The Finance Committee bill's principal provisions affecting employee ownership are:
  1. Diversification: For all defined contribution plans except free-standing ESOPs, employees must be able to diversify company stock in their accounts after they have been in the plan for not more than three years. There is a three-year phase in for this rule. Immediate divestiture would be available for employees at age 55 or older.
  2. 30-Day Notice of Blackout Periods: Employees must be given a 30-day advance notice of any blackout periods during which plan activity will be blocked.
  3. Information Requirements: Employees in plans in which they can make investments must be given quarterly statements; where they cannot, they must be given annual statements. In addition, they must be provided annual statements providing investment guidelines, including the risks of failing to diversify. Any information provided under securities laws to investors would also be required to be given to employees invested in company stock.
  4. Investment advice: Companies can limit their fiduciary liability on providing investment advice by hiring independent advisors who agree to specified guidelines, including taking into account diversification issues with respect to company stock.
  5. Individuals in plans have the right to sue fiduciaries: The bill clarifies how individual participants can sue plan fiduciaries.

The reform of pension rules now will likely become a subject of debate in the upcoming elections. If the Democrats win control of the House and retain control of the Senate, a stronger bill would be likely to pass next year, although too strong a bill would likely be vetoed. It now appears virtually certain, however, that ESOPs in closely held companies will be unaffected, while ESOPs in public companies will face only relatively minor changes, and then only if they are combined with 401(k) plans or allow employee investment in company stock.

Finance Committee Bill Prevents IRS From Imposing Payroll Taxes on ISO and ESPP Exercises

The Pension Reform Act passed by the Senate Finance Committee concurs with the House-passed pension bill to prevent the IRS from imposing payroll tax withholding on ESPP and ISO spreads on exercise. The IRS has indicated that it might impose these taxes in 2005 or later. While it seems unlikely that the bills will become law this year, it does indicate a strong, bi-partisan opposition to the taxes and the likelihood that Congress will act to prevent their imposition if the IRS proceeds.

Senate Nears Agreement on Accounting Reforms; Stock Options Expensing Appears Dead

The Senate Banking Committee is close to agreement on a compromise version of broad reforms of the accounting profession. The agreement focuses on setting boundaries on accounting firms providing consulting services and on establishing standards for the oversight of accounting procedures. Notably dropped from the compromise was a proposal that was part of a bill introduced by Banking Committee chair Paul Sarbanes, D-MD (the "Public Company Accounting Reform and Investor Protection Act") that would direct the SEC to study the impact of accounting rules on stock options. Advocates for stock options feared the proposal would build momentum for requirements that companies expense stock options on their income statement. Senator Daschle (D-SD) has indicated he may try to add back a similar provision on the floor.

Meanwhile, Senator McCain (R-AZ) was blocked by the Democratic leadership in his effort to force consideration of the Levin-McCain proposal to require companies to account for options in the income statements. The proposal also does not occur in the much weaker House bill, so it appears dead, at least in this legislation. However, proponents of the reform have vowed to introduce the proposal as an amendment to other legislation, and editorial momentum for the change is building. Craig Barrett, CEO of Intel, has suggested requiring expensing just for options granted to the top five corporate officers. Senator Lieberman (D-CT) has expressed an interest in the idea.

Author biography and other columns in this series

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