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The Employee Ownership Update

Corey Rosen

December 15, 2008

(Corey Rosen)

Tribune Company Bankruptcy and the ESOP

The Chapter 11 bankruptcy filing by the Tribune Company will have only a nominal effect on employee retirement benefits. The ESOP was formed in 2007 as a new plan (a prior ESOP was cashed out as part of the transaction). No existing employee funds were used to help fund the plan. Before the ESOP transaction, the Tribune funded a 401(k) plan with up to a 4% of pay match, plus up to an additional 5% more depending on profits (of which there were none recently and certainly would not have been this year no matter who owned the company). With the ESOP, the company replaced its contribution to the 401(k) with a hybrid defined contribution/defined benefit pension plan that received an automatic 3% of pay contribution. No ESOP allocations had been scheduled until 2009. So the net impact on retirement is small.

The bankruptcy may trigger some complex tax issues. As a 100% S ESOP, the Tribune has just one shareholder. But if the reorganization is structured so that there are more than 100, or one or more owners are not qualified S owners (such as non-U.S. citizens or non-tax-paying entities), the S election will be broken, causing potential taxation issues. In addition, if the company's assets are sold, there could be built-in gains taxes if the benefit is greater than the company's taxable income (a very likely scenario). Cancellation of debt could also trigger tax issues.

While most new stories described how the bankruptcy would have little effect on employee retirement plans, the New York Times and a Reuters wire story that did not appear widely picked up both got it very wrong, asserting that employee pension money had been used to pay for the buyout. None of the stories provided any context about ESOPs in general, much less the fact that, overall, ESOP participants have about three times the retirement assets and the same amount of diversified assets as comparable employees in comparable companies. Getting that story out to decision makers will be essential in the coming year.

Employee Ownership in LLCs

Limited liability companies are a popular form of corporate organization for smaller companies. They are taxed in much the same way S corporations are taxed, but, unlike S corporations, they do not have to distribute earnings pro-rata to owners. If you search the Web for employee ownership in LLCs, you'll find almost every article suggesting that it is best to convert to S or C status to make it more practical. In fact, however, LLCs can have forms of broad-based equity sharing. Capital interests work similarly to restricted stock and profits interests similarly to stock options. More common, however, would be an LLC unit that would function in much the same way as phantom stock or stock appreciation rights and be paid out in cash. The "interests" approaches raise some tax uncertainties that, while subject to common practice, are still mostly governed by proposed regulations that were never finalized.

The NCEO has an article on this topic that we can send at no cost to members. Contact Corey Rosen at for details.

IRS and Treasury Release Proposed Section 409A Income Inclusion Regulations

On December 8, 2008, the IRS and the Treasury Department issued proposed regulations on the calculation of amounts includible in income under Section 409A(a) of the Internal Revenue Code and the additional taxes imposed by this section with respect to service providers participating in certain nonqualified deferred compensation plans. The final 409A regulations take effect on January 1, 2009. All nonqualified deferred compensation plans must be brought into full operational and written compliance with the regulations by then. These proposed regulations provide some initial insight into how to determine this tax impact, although they are likely to be revised in certain respects. However, under IRS Notice 2008-115 (issued separately on December 10, 2008), the proposed regulations can be relied upon with respect to the calculation of income includible under Section 409A and the calculation of the additional taxes until the issuance of final regulations. Additionally, the IRS and the Treasury Department released Notice 2008-113, describing an enhanced correction program for certain operational errors that occur under Section 409A.

Apply Soon for Winning Workplaces Awards

In the last two years, 10 of the 30 winners of the annual Winning Workplaces awards have been NCEO members (and a few more became members after learning about employee ownership at the meetings). The awards, given to 15 companies each year, are for companies with 500 or fewer employees that have innovative employee-centered management practices. I serve as one of the judges (but recuse myself from NCEO member evaluations) and, based on that experience, I know that many of our members would be extremely strong candidates. Companies can nominate themselves or consultants can nominate their clients. The winning companies have effective, innovative employee-centered processes such as work teams, open-book management, good overall compensation, well-developed training programs, and other practices very common in employee ownership companies. Companies that can do this despite being in industries that don't typically encourage employee involvement get an extra edge, but that is just one factor. Nominations (but not applications) must be in by the end of January.

The application process is much less demanding than some other award programs. Stories about each winner appear in an October special section in the Wall Street Journal, which cosponsors the award. It's great publicity for your company, an effective recruiting tool, and another way to attract customers. By maintaining a high percentage of employee ownership company winners, it also helps build recognition for employee ownership and encourages more companies to set up plans.

To apply, go here on the Winning Workplaces Web site. Winning Workplaces also sponsors a series of webinars on best workplace practices. For a list of upcoming events, some of which feature employee ownership companies, go here.

Author biography and other columns in this series

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