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The Employee Ownership Update

Corey Rosen

March 15, 2007

(Corey Rosen)

Retirement Reform in Budget Excludes ESOPs

Last year, the Presidential Panel on Federal Tax Reform proposed sweeping changes in retirement plan tax benefits. While the proposal did not specifically mention ESOPs, it appeared to eliminate all existing defined contribution plans and replace them with an Employer Retirement Savings Account. When asked, members of the panel said they had not specially discussed ESOPs, leaving some ambiguity about whether these plans would be covered by this reform or only plans focused on employee savings, such as 401(k) plans.

The new Presidential budget makes it clear that the reform would apply only to savings arrangements, including 401(k), SIMPLE, 403(b), 457, and SARSEP plans, but not ESOPs, stock bonus plans, or non-contributory profit sharing plans. ESOPs that are combined with 401(k) plans could be affected, although plans run separately presumably would not be.

Prospects for the reform on this front remain dim, as Congress seems disinclined to make major changes in retirement law after the four-year struggle to craft the Pension Protection Act, as well as substantial industry opposition to the proposal.

IRS Issues Correction Programs CD

The IRS has issued a very useful compilation of requirements and procedures for correction programs when a qualified plan fails to abide by plan or ERISA requirements. The material is easy to navigate and provides considerable detail on each of the available correction programs. For more information, go to this link or call 1-800-829-3676 and ask for Publication 4050.

Seven States Tax ESOP S Earnings as Individual Income

The District of Columbia, Louisiana, Michigan, New Hampshire, New Jersey, New York (and New York City), and Tennessee do not provide the same exemption from income tax for S corporation earnings attributable to an ESOP as does federal tax law. In addition, 23 states impose some kind of tax other than income tax on S corporations, including ESOPs. Alabama, California, Connecticut, Hawaii (financial corporations only), Illinois, Iowa (financial corporations only), Kansas (banks and S&L's only), Kentucky, Maine (financial corporations only), Massachusetts, Minnesota, Mississippi, Missouri, Nebraska (certain financial institutions only), New Hampshire, New Mexico, North Carolina, Oklahoma, Pennsylvania, Rhode Island, South Carolina, Vermont, and West Virginia all have some kind of franchise, corporate income, excise, or entity tax. These taxes may be fairly nominal in some states. An article from Morgan, Lewis, and Bockius providing more detail on these taxes will be published in a chapter in a forthcoming issue of the NCEO's Journal of Employee Ownership Law and Finance and the third edition of the NCEO's book S Corporation ESOPs.

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