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The Employee Ownership Update

Corey Rosen

January 1, 2006

(Corey Rosen)

The Year in Employee Ownership

It seems that you can't be any kind of publication and not have a year-end review, often in the form of top ten lists. Not wanting to violate important traditions, here is my list of the top ten developments in employee ownership for the year.
  1. FASB issues new accounting rules for options: Nothing seemed to make more noise, and cause more change, than the new rules requiring companies to take a charge for options on their income statements. Yet close to 90% of all companies say they believe the research that accounting changes won't affect stock prices.
  2. "Stock drop" lawsuits march on: Dozens of lawsuits proceeded alleging that plan fiduciaries in 401(k) plans, and a few ESOPs, violated ERISA for allowing employees to continue to invest in company stock, not telling employees about impending financial problems at the company, not selling company stock in the plan, and/or continuing to make matching contributions in company stock. None of the lawsuits has resulted in any precedent-setting decisions yet, although a few have been settled outside of court. Interim decisions so far have come to contradictory results on many issues, but generally agree that board members who appoint fiduciaries have an active duty to monitor them and, with some exceptions, that fiduciaries cannot rely on securities law conflicts to avoid telling employees about impending financial problems that might affect their 401(k) decisions.
  3. Presidential panel urges end to most defined contribution plans, including ESOPs: A presidential panel on tax reform urged the elimination of the defined contribution system as we know it, to be replaced by two new retirement savings programs that essentially would be souped-up modifications of current IRA and 401(k) plans. ESOPs would be among the plans eliminated. It is not clear whether Congress will take these proposals any more seriously than it has prior tax reform panel recommendations.
  4. Deferred compensation rules issued: New rules on deferred compensation make it clear that stock appreciation rights can be exempted from the requirements of the law. They also make it clear that closely held companies will need much more rigorous valuation approaches to make sure their stock options and stock appreciation rights are issued at fair market value, a requirement for these plans to gain exemptions from the deferred compensation rules.
  5. Equity plan eligibility drops: Fewer employees will be getting grants of options or other equity awards in 2006, according to a variety of surveys. Only about 60% as many companies will make most or all employees eligible for awards as did five years earlier.
  6. ESPPs survive: Despite dire predictions of their imminent demise in the wake of new accounting rules, only about 15% of companies say they will either eliminate their employee stock purchase plans (ESPPs) or make them so unappealing they might as well eliminate them. A larger, but still minority, group will make the plans somewhat less attractive, however.
  7. S corporation ESOP rules issued: Perhaps the most important development in the new S ESOP rules is that a plan participant who accumulates more than 10% (or 20% as a member of a family group) of the deemed owned shares in an ESOP is a disqualified person, even if no additional allocations are made. If this individual or family group owns more than 50% of the deemed owned shares of the company as well, then the S ESOP rules are violated.
  8. Defined contribution plan changes still on hold: Congress still has not acted on reform of defined contribution plans, including allowing greater diversification of company stock in 401(k) plans and most public company ESOPs. But action seems closer than ever.
  9. Publix again tops Employee Ownership 100 List: Publix Supermarkets again is the largest majority employee owned company in the U.S., with 125,000 employees and growing. This year, companies need 900 employees to make the list, up from 700 the year before, reflecting the increased growth of 100% S corporation ESOPs.
  10. New research shows ESOP participants doing very well: New studies by the NCEO, and both the Ohio and Massachusetts employee ownership programs, show that ESOP participants are accumulating considerably more in their retirement plans than employees generally do in non-ESOP companies.

Author biography and other columns in this series

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