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The Employee Ownership Update

Loren Rodgers

July 1, 2015

(Loren Rodgers)

IRS Encourages Prototype ESOP Document Language

In June the IRS announced that it will allow prototype and volume submitter ESOP plan documents. At the same time, it also issued sample plan language for ESOPs. The IRS hopes not only to reduce its own costs in reviewing plan documents but also to reduce the costs to companies considering ESOPs by avoiding custom-created plan documents.

In Revenue Procedure 2015-36 (PDF), the IRS allowed ESOPs that meet certain requirements to qualify for pre-approval for initial and cyclical letters of determination if they adopt a prototype plan or volume submitter plan. Under a prototype plan, an employer can adopt a plan from a "sponsor" (here meaning the sponsor of the prototype, not the ESOP company) that is preapproved, or can use a plan submitted by a volume submitter.

The implications for the cost of adopting an ESOP is still unclear, and the NCEO will continue to report on developments as ESOP experts analyze the implications of this announcement.

New Equity Compensation Legislation in Australia

On June 25, the Australian Senate passed the Tax and Superannuation Laws Amendment (Employee Share Schemes) Bill 2015, designed to encourage equity compensation plans. The amendments would reverse a 2009 bill that caused a dramatic reduction in the use of equity compensation plans in Australia. The changes in the current bill, effective as of today, July 1, will improve the tax treatment of options and discounted shares, including having options taxable at exercise rather than vesting and providing certain qualifying employees in startup companies with capital gains treatment. Employee Ownership Australia and New Zealand estimates that the change would add AUS 1.4 billion ($1.1 billion USD) to the Australian economy over the following 10 years.

A Blog Post to Share

Inc. magazine today published a post by Corey Rosen, A Belated Graduation Speech to Baby Boomer Business Owners. It starts:
Graduation speeches have come and gone again, urging young grads to go out and pursue their dreams. Well, you did that. You built a successful company that has created financial security for your family, jobs for employees, taxes for your community, and useful products and services for your customers.

But now you are thinking about graduating too. It's time to start scaling back your involvement in the business and getting some liquidity for all that equity you have built up in the company.
Consider sharing this post with business owners you know. Inc.'s site makes it easy to promote via social media, or you can just forward this paragraph. ESOPs everywhere benefit when more business owners hear the message of Corey's blog post: "there are few better ways to preserve your legacy—and keep an active role in it if you like—than an ESOP."

Circuit Court Rules ESOP Fiduciaries Should Have Sold Stock in Plan Based on Nonpublic Information

In Harris v. Amgen, Inc., remanded to the Ninth Circuit Court of Appeals by the Supreme Court following its decision in Dudenhoeffer, the Ninth Circuit said that the fiduciaries should have removed Amgen stock as an investment option in the company's 401(k) plan. Such a removal would have the same effect on the market as disclosure of the potentially adverse information, but the court said that securities laws would ultimately require that decision anyway.

In a sharp dissent, Judge Alex Kozinski, joined by three others concurring, said that the decision failed to incorporate the heightened pleading standards of Dudenhoeffer and would result in fiduciaries scrambling to remove or sell stock any time any potentially adverse news arose. The court then stayed enforcement of the decision pending an appeal to the Supreme Court.

Nonprofit Sets Up Innovative ESOP Structure

In what could be a model for others, a Pennsylvania nonprofit organization has developed an innovative structure that incorporates employee ownership. Supportive Concepts for Families (SCFF), a 501(c)(3) nonprofit provider of supportive group home services for people with developmental disabilities, has set up a subsidiary S corporation holding company that will be 49% owned by an ESOP. The holding company will own the real estate assets of SCFF and lease them back to SCFF. In the future, SCFF plans for the holding company to acquire other operating assets, such as a manufacturer of energy-efficient equipment that is used in the group homes that SCFF operates. SCFF has 1,100 employees and anticipates becoming larger.

Nonprofits, including SCFF, traditionally have had difficulty in acquiring real property, partly because they cannot raise equity capital to fund down payments or take a tax deduction for mortgages. With this new model, appreciated real estate assets were transferred to a holding company and exchanged for stock. As the holding company acquires additional properties, the process will be repeated. The value of ESOP assets depends on the value of the property and its leases. SCFF will receive distributions from the holding company to pay its unrelated business income tax on any profits attributable its 51% ownership of the holding company; the ESOP will receive a pro-rata share.
The transaction was put together by Angler West Consultants, which has dubbed (and trademarked) the plan a "C3SOP."

Think Tank Proposes Retirement System Reforms

The Hamilton Project released the report Building on What Works: A Proposal to Modernize Retirement Savings by John Friedman of Brown University. One proposal is to adopt Universal Retirement Saving Accounts (URSAs). Dr. Friedman argues against allowing such accounts to hold employer stock because "the risk properties of such holdings are inappropriate for retirement savings" (p. 14). Celebrates 15 years, a primary resource on equity compensation for employees, reached its 15-year milestone on June 22.

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