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The Employee Ownership Update

Loren Rodgers

March 1, 2013

(Loren Rodgers)

New Tax Law Extends Shorter Period for Recognition of Built-In Gains Tax

The American Taxpayer Relief Act (ATRA) made changes in the recognition period for built-in gains taxes for C corporations converting to S status. In the past, the law provided that such companies must pay tax on the sale of appreciated assets for 10 years after conversion. The 2009 tax law provided that for companies that had already begun their recognition period, for any taxable year beginning in 2009 and 2010, no tax will be imposed if the seventh taxable year in the corporation's recognition period precedes one of these taxable years. For tax years beginning in 2011, the recognition period was limited to five years, but just for 2011. The new law extends that provision for 2012 and 2013, meaning companies that have been an S corporation for at least five years at the beginning of the taxable year in 2012 or 2013 will not owe the tax. The 10-year rule will apply beginning in 2014 unless Congress again makes changes.

New Data on Company Stock in 401(k) Plans

Company stock in 401(k) plans fell to 8% of total 401(k) plan assets in 2011, according to a new report, "401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2012," from the Employee Benefit Research Institute. The yearly analysis is the definitive look at 401(k) plans and is based on data from 1.2 million plan participants in a representative range of over 64,000 companies. Company stock in 401(k) plans has steadily declined since its peak of 19% in 1999.

Many companies do not offer company stock as a 401(k) plan option. Just 2.3% of the companies in the study offered company stock, but because the companies that do tend to be among the largest employers, 38.2% of the participants are in a plan where company stock is an option. Among these, 19.7% of their 401(k) balances are in company stock. The percentage in company stock increases gradually with age cohorts from 12% for those in their 20s to 21% for those in their 60s. While this could be because older employees have more confidence in their employer, a more likely explanation is that this age cohort started investing in company stock when company stock was more popular, suggesting that further declines in company stock in these plans is likely. Among those with company stock in as an option in their plans, 74% of participants held less than 20% of their assets in company stock, and 51% held none.

Sherwin-Williams to Pay $80 Million to ESOP Participants in Settlement

The U.S. Department of Labor (DOL) and Sherwin-Williams reached an agreement under which the company will pay $80 million to current and past participants of its ESOP. The settlement followed an investigation by the DOL's Employee Benefits Security Administration (EBSA) into possible ERISA violations connected with two transactions, one in 2003 and one in 2006, in which the plan purchased shares issued by Sherwin-Williams solely for the purpose of those transactions. The assistant secretary of labor for EBSA, Phyllis Borzy, said that the plan's fiduciaries must act "to manage plan investments to provide a secure retirement, not to help the plan sponsor secure tax breaks that are wholly disproportionate to the benefits actually provided to retirees." EBSA's investigation concluded that the price paid by the plan was excessive, relative to the benefit received by plan participants. As a result of the settlement, the plan's fiduciary, GreatBanc Trust Co., will audit its engagements that involve plans with company stock and provide a report to the DOL.

Fox Business News on Employee Ownership

Michael Woodward, a commentator for Fox Business News, wrote a column on employee ownership on February 25. He argues, "When you own something, you treat it differently. You form a psychological connection that creates a feeling of responsibility... In an economy that has always been dominated by small businesses and budding entrepreneurs, it's surprising that more executives and business owners haven't taken interest in providing ownership opportunities to their employees. Creating that attachment can go a long way in fostering a customer-centric mentality as well as a greater interest in business efficiency."

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