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The Employee Ownership Update

Corey Rosen

September 14, 2007

(Corey Rosen)

Deadline for Written Compliance with 409A Delayed Again

The deadline for deferred compensation plan documents to comply with Section 409A of the Internal Revenue Code has been pushed back again, this time until December 31, 2008. Originally, plans were required to comply by January 1, 2007. IRS Notice 2007-78 provides only limited transition relief; for 2007, companies still must comply in substance with the law and final regulations that were issued in April. The notice does not extend the deadline for compliance in the operation of plans beyond the previously announced date of January 1, 2008.

What the notice does provide is an extension of the time companies have to create appropriate plan documents under which deferred compensation arrangements will operate. Section 409A requires that deferred compensation be granted only under written plans, which has not been common practice in the past. The documents must comply with all written regulations and accurately reflect the operation of the plan from January 1, 2008, through the date of the amendment of the plan to conform with the new rules. The notice lays out a specific procedure for how to designate the time and form of deferred compensation so that it complies with the regulations, and gives companies until the end of the year to adopt appropriate language. It does not change the substance of the requirement concerning what kinds of deferrals and payments are allowed.

15% of Inc. 5000 Companies Plan to Sell to an ESOP

Roughly 15% of the companies on the Inc. 5000 list of fastest growing private companies that responded to an Inc. magazine survey say that selling to an ESOP is a likely strategy for transferring ownership. The percentage is not precise because only 62% of the companies on the list responded to the survey, and the poll let respondents choose more than one option. The most popular choice (72.6%) was selling to a private buyer, followed by going public (28.2%), selling to an ESOP (22.3%), and leaving the company in part or total to partners (15.3%). Our 15% estimate comes from recalculating the totals by adding up all the choices and dividing that into 22.3%.

The percentage may turn out to be higher than that long term. In reality, well under 1% of these companies will likely go public (follow-up surveys of companies on the smaller Inc. 500 list have shown that only about 10 in 500 end up going public). The percentage is impressive given that these are fast-growing and often young companies, not traditionally the primary market for ESOPs. The results appear in the September 2007 issue of Inc. magazine.

Employee Ownership Gains Ground in South Africa

The announcement by the South African energy giant Sasol that it is giving its 27,000 employees an estimated 4 billion Rand worth of stock (about $561 million) is the latest sign that broad-based ownership plans are gaining traction there. Several of the country's largest companies, including most of the major mining companies, have also set up plans. Typically, as at Sasol, these plans own between 3% and 7% of the company, and the amounts employees will receive are often substantial compared to their salaries. At Sasol, for instance, the average stock award per employee is about $20,500. The shares are held in trust and subject to vesting, so they could be worth much more over time.

The plans are being driven by a few factors. First, the Black Economic Empowerment law gives companies points for creating ownership among the country's black population. The rules are flexible, giving companies points even for sharing large amounts of equity with already well-off black investors, for instance. Broad-based plans earn points as well, however. Companies with enough points get preference in government contracting. In addition, a tight labor market for skilled employees and a perception among some companies that sharing ownership and getting employees more involved in job-level decisions can be good for business are contributing to growth.

South Africa's tax laws, however, provide no incentives to share ownership, either at the corporate or employee level. Experts agree that some kind of even modestly favorable framework is necessary for long-term growth of the idea.

Author biography and other columns in this series

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