The Employee Ownership Update
May 14, 2010
IRS Said to Be Set to Require Written Distribution PoliciesThe IRS is going to require ESOP companies to submit written distribution policies, whether in their plans or as separate documents, according to ESOP attorney Larry Goldberg. Goldberg and other ESOP attorneys have been working with the so-called "ESOP Cadre" at the IRS on issues concerning the letter or determination process. Until this year, the IRS has reviewed plan documents simply to assure that the maximum payout terms were specified. Many ESOP companies either do not have such policies or have only rudimentary ones. Currently, ESOPs must submit their plan documents for new letters of determination in the five-year cycle for resubmission of plans. While the language can be included in the plan document itself, any changes the company might want to make would require a plan amendment. Most advisors agree a better approach would be to write the plan to allow for the maximum amount of time for distributions to be made, leaving the details of benefit distribution planning to be spelled out in the ESOP distribution policy. The policy might, for instance, provide for more liberal distribution rules, provided this is done in a consistent and non-discriminatory manner specifically detailed in the plan.
Coincidentally, the NCEO has been working to develop an issue brief with sample distribution policies, detailed comments, a description of the requirements for distribution, and further suggestions on other language such policies might have. The brief, titled ESOP Distribution Policies: Sample Policies and General Considerations in Crafting an ESOP Distribution Policy, is now available at $15 for NCEO members and $25 for nonmembers.
Boustany and Pomeroy Introduce ESOP Improvements ActReps. Charles Boustany (R-La.) and Earl Pomeroy (D-N.D.) have introduced the "Employee Stock Ownership Plan Promotion and Improvement Act of 2010" (H.R. 5207) in the U.S. House of Representatives. The bill would:
- eliminate the 10% penalty tax on distributions made directly to ESOP participants in S corporation ESOPs (these are now taxed as early distributions, not dividends);
- exempt qualifying dividends paid on ESOP shares from alternative minimum tax calculations;
- allow sellers of stock to qualifying ESOPs in S corporations to take a deferral of gains under Section 1042 of the Code (this is currently available only to C corporations);
- allow sellers to ESOPs taking a deferral of gains in the proceeds to invest in certain mutual funds;
- redefine 25% ownership for purposes of Section 1042 of the Code to mean owners of 25% or more of all the voting shares or the total value of all the shares (current rules define a 25% owner as one owning 25% or more of the shares of any class of stock; 25% owners are excluded from allocations of shares subject to Section 1042 treatment); and
- redefine a business that otherwise meets the definitions of a small business under various federal loan and procurement programs to include those that are 50% or more owned by an ESOP (current rules exclude such businesses).
PBS NewsHour Story on SRC HoldingsOn April 28, the PBS NewsHour did a followup story on ESOP-owned SRC Holdings (formerly Springfield ReManufacturing Corp. The story shows how the open-book management at SRC and businesses SRC has worked with has allowed them to grow to 1,200 employees and survive the recession without a layoff despite a significant reliance on the automotive industry. (And the company is now hiring.) To see the story, go to this link on the PBS site.
At the annual Great Game of Business meeting, Stack gave an extraordinary speech about why the economy is on the verge of a rapid recovery and how companies need to prepare for it. He also discussed how SRC used high-involvement contingency planning to manage through the recession to develop new business opportunities. Stack's New York Times blog will have a transcript of the speech in successive installments.
This is the most insightful speech I have ever heard about managing a business and a must-read for ESOP companies.
Author biography and other columns in this series