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S-corp ESOP, non-allocation year consequences


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I'm starting to pick up a little more information on ESOP's, and the more I see, the less I like them!

I just wanted to make sure I've got this right. If you have a non-allocation year, even if there actually isn't any contribution/allocation for that year, the client is still screwed because a prohibited allocation includes both an allocation AND an "impermissible accrual." And the inpermissible accrual potentially includes accumulated contributions, and not just current year allocations. In turn, this puts you under the prohibited allocations consequences, etc., etc...

Have I got that right? I realize the IRS has thankfully provided some "fail-safe" language, but wow!

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I beleive you have it right. I must admit I have never seen a 409(p) failure. Everyone just agrees failure isn't an option because it costs too much.

Although I have a much higher view of S Corp ESOPs, but then again I make my living working with them so I could be accused of being biased. In the end I have seen the extra cash flow from not having to pay taxes at the corporate level really benefit the employees many times. In fact there are times I think to myself I really need to find a way to get hired by one of these companies they are making their employees very rich.

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