ESOP/FYI

 

Economic Downturn – Look for Employee Buyout Opportunities

 

The current economy looks similar to the 1980’s. Many companies are cutting back their less profitable operations to save money or seeking to shed assets for other strategic reasons. Some of those assets may be viable companies where union member jobs could be secured through employee ownership. Quick action at the first inkling of such a situation is very important. Unlike the early 80’s there are now a wide variety or resources available to assist with pre-feasibility studies, as well as union friendly lenders. For more information see www.esoplaw.com or call 313-331-7821.

 

Utility Companies Merge and Lights Go Out in California  - What to do?

Utility companies are heavily regulated and many utility company employees own company stock, giving them shareholder rights. These special features of utility companies provide many tools for unions to protect their members. Based on her experience representing SEIU Local 80 Gas Workers in the Detroit Edison and MichCon merger, Deb Olson presented “Labor Union Utility Merger Toolbox”, which you can find at http://www.esoplaw.com/utoolout.htm to a recent meeting of the five major utility workers unions.

 

Need help with business law or transactions?

Deb Olson is now of counsel to Jackier, Gould, Bean, Upfal & Eizelman, P.C. (JGBUE) a firm specializing in business transactions. Deb specializes in representing employee owned companies and employee benefit plans, assisting companies and business owners to create employee ownership plans, and providing business law assistance to labor organizations. See www.esoplaw.com.  JGBUE specializes in business law, serving individuals, partnerships, limited liability companies, corporations and associations (both for profit and tax exempt) in connection with all areas of corporate, commercial and business planning and transactions.  See www.jackiergould.com.

 

ESOP Legal Update

 

Anti-abuse provisions adopted for S Corporation ESOP – likely to preserve the S Corporation ESOP Benefits – These changes seemed imminent in the 106^th Congress, but were killed by Republicans hoping for a “better” tax bill under President-Elect Bush. They are likely to be reintroduced in this Congress.

 

Retirement Security and Savings Act of 2000 – On September 7, 2000 the Senate Finance Committee approved, by a vote of 19 to 0, a package of ERISA proposals including pro-ESOP proposals very similar to those passed by the House in July (below).

 

Comprehensive Retirement Security and Pension Reform Act of 2000 – H.R.4843 was passed by the House on July 19, 2000 with a vote of over 400 in favor and 25 opposed. Among other things, it includes these pro-ESOP provisions. It:

·        allows ESOP dividends to be deducted by the Company even if they are reinvested by the employee;

·        incorporates the Breaux proposals to prevent abusive use of S Corp. ESOPs, without eliminating their benefit for most companies;

·        eliminates the 25% of pay contribution limit for defined contribution plans under IRC Sec. 415; increases the annual addition dollar limits from $30,000 per year to $40,000 per year in $1,000 increments; and increases the company contribution limit from 15% for a single plan to 25% under IRC Sec. 404;

·        change the top-heavy rules;

·        increases the maximum compensation limit for contributions from $170,000 to $200,000;

·        raises the annual permissible 401(k) contribution limit in $1,000 increments from $10,000 per year to $15,000 per year, and would not count elective deferrals in this limit.

 

Specifics of Proposed S Corporation ESOP Anti-Abuse Proposals

The company must pay a 50% excise tax and the individual is also taxed on amounts allocated to ESOP participants who are “disqualified persons” under the

Act.

·         “Disqualified persons” are those who:

1)      collectively own 50% or more of the company, and

2)      either; (a) individually own 10% or more of the company or (b) along with siblings, ascendants and descendants own more than 20% of the company.

·        For the purposes of these ownership calculations, shares owned in the ESOP plus a pro-rata share of unallocated ESOP stock is calculated along with any stock owned outside the ESOP as “deemed owned shares”.

·        “Synthetic equity”, such as stock options or other claims that can be translated into equity, count as “deemed owned shares”.

·        Penalties accrue in any year in which an ESOP allocation is provided to disqualified persons – the company pays a 50% excise tax and the allocations are taxable to the disqualified persons. In the first year, these penalties are owed on all the “deemed owned shares” not just those in the ESOP.

 

Certain stock options are now exempt from overtime pay requirements.

The President signed the Worker Economic Opportunity Act (S.2323, H.R. 4182) which exempts stock options from the overtime pay requirements of the Fair Labor Standards Act, provided they meet certain criteria.  The stock options or stock appreciation rights must: 1) be granted at not less than 85% of fair market value; 2) be held at least 6 months after grant (except for death, disability and other special circumstances); and 3) plan participation must be voluntary.  This legislation arose in response to a DOL opinion to the contrary.

 

Supreme Court case opens door for more ERISA liability for non-fiduciary advisors

In Harris Trust Savings Bank v. Solomon Smith Barney Inc. (27 BPR 14339, 6/13/00) the Court held that if an advisor is a “knowing participant in a fiduciary breach” then that party can be liable for the “act or practice” that broke the law. This contrasts to the shield provided to non-fiduciaries by the 1993 Supreme Court decision in the Mertens v. Hewitt Associates (20 BPR 1235) case. Thus, knowledge of such a breach, not just active participation, may be a source of liability.

 

IRS disallows company going from S to C back to S corporation after taking Sec. 1042 election.  PLR 199952072 .

 

An employer can deduct dividends paid on its ESOP stock under Sec. 404(k) when paid directly to participants, or if the dividends are used by the participant to reinvest in other investments within the Plan.  Also, if the participant defers wages, in an amount equal to dividends paid out to him, the deferral is not taxable wages. PLR 200033047

 

 

Amounts received by an ESOP due to Plan termination, and allocated to participants’ accounts, were determined not to be employer contributions, and thus were “earnings” and not “annual additions” under IRC Sec. 415(c)(2). PLR 200034039. There have been a number of earlier contradictory rulings; so much care is required in this area.

 

 

International on-line discussion of employee ownership best practices

 

The Capital Ownership Group (COG) is a network of professionals, business, labor and government leaders and staff, academics and activists on six continents (including 284 registered participants in one or more of our 10 on-line working groups) whose mission is to: create a coalition that promotes broadened ownership of productive capital; reduce inequality of income and wealth; increase sustainable economic growth; expand opportunities for people to realize their productive and creative potential; stabilize local communities by improving living standards; and enhance the quality of life for all, collecting and developing employee ownership policies and implementation strategies.  With funding from the Ford Foundation, COG is organizing this international network, including an international policy conference to be held in Washington, D.C. in October 2002. As of February 1, 2001, COG has responded to over 129,664 data requests (26,907 in December 2000) from people in 92 countries wish to propose a working group contact cog@kent.edu or COG Executive Director, Deb Olson (313) 331-7821.