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The Employee Ownership Update

Corey Rosen

August 31, 2009

(Corey Rosen)

Congressional Budget Office Lists ESOP Tax Benefits as Potential Cost Savings

The Congressional Budget Office (CBO), in its annual report on budget options, lists eliminating special ESOP tax benefits as a way to save tax dollars. It specifically references the deductibility of dividends and the ability of certain sellers to an ESOP to defer taxes on their gain, although it states that all special benefits could be removed so that ESOPs have the same tax treatment as other benefit plans. The CBO says this would save $600 million in 2010, gradually growing to $1.3 billion by 2014. The report says that studies on ESOPs and corporate performance are mixed and that encouraging ESOPs can reduce retirement plan diversification.

The option is one of 188 listed. The options are drawn from prior legislative proposals from members of Congress, the executive branch, CBO staff, and private entities. The options are meant to be illustrative only. On its related blog, the CBO states that "they are intended to reflect a range of possibilities, not a ranking of priorities, and the selection or omission of a potential policy change does not represent an endorsement or rejection by CBO." The CBO has listed these changes in prior reports.

For details, go to the Congressional Budget Office, Budget Options, Second Volume, option 22, at this link.

Smaller Companies Have More Generous Stock Purchase Plans and Higher Participation Rates

The new NCEO survey on employee stock purchase plans (ESPPs) shows that companies with fewer employees have both more generous plan features and higher participation rates. The differences are dramatic. For instance, 45% of the companies with 500 or fewer employees report hourly participation rates over 30%, compared to 17% for companies with more than 5,000 employees. Seventy-nine percent of the companies with 500 or fewer employees have a look-back feature in their plan, but only 45% of the largest companies do. Twenty-seven percent of the smaller companies have offering periods of 12 months or more, compared to 17% of the largest. Forty percent of hourly employees in smaller companies contribute 5% or more of their pay to the ESPP, compared to 21% in the largest companies. Differences in the amount of the discount offered, however, were very small. Similar differences for these measures show up for non-managerial salaried employees as well.

The differences show up in a consistent step-wise pattern: for each increase in size category, the generosity of the plan and the participation rates goes down. Of course plan features and participation rates are highly, if imperfectly, correlated. Larger companies may feel more pressure from institutional shareholders to keep the expensing attributable to the ESPP down, or it may be that smaller companies have more of a "we're all in this together" culture.

The results are from a major new survey of ESPPs by the NCEO and the Certified Equity Professional Institute (CEPI). It is the largest ESPP survey ever conducted. To obtain either a detailed report on the survey, or full access to the data base with dozens of questions, go to this link.

Seventh Circuit to Examine Class Standing Issues Raised by LaRue Decision

In its LaRue decision (LaRue v. DeWolf, Boberg & Associates, 128 S. Ct. 1020, 42 EBC 2857 [2008]), the Supreme Court allowed individuals to sue ERISA plan fiduciaries to recover their personal losses from the plan. Before LaRue, losses could generally only be claimed on behalf of the plan itself, which could make restoring individual accounts tricky. But now that individuals can sue for recovery on their own behalf, how will class-action lawsuits be affected in situations where the breaches either have differential effects on individual losses or there is no loss to the plan as a whole? For instance, in a stock drop lawsuit, only some plan participants may have been damaged and some may even come out ahead (for instance, an individual who sells some or all of his or her stock when its price is artificially inflated who but stays in the plan).

The U.S. Court of Appeals for the Seventh Circuit is taking up this issue by consolidating four different lawsuits, one of which (Howell v. Motorola, No. 07-3837, consolidation order, 7th Cir., Aug. 17, 2009) involves allegations of fiduciary breaches over retaining Motorola stock in a 401(k) plan. Motorola and other defendants in the cases being consolidated argue that because individuals can now sue for recovery of losses to their own accounts, and because the individual circumstances of plan participants vary so widely, class certification is no longer appropriate.

If this argument ultimately succeeds, the ironic effect of LaRue may be that rather than making lawsuits against plan fiduciaries easier, it makes them harder, because few individual participants will have the resources to pursue this kind of litigation (indeed, LaRue himself has given up his case).

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