S Corp ESOP

[Guest Smokin]

Has anybody done a transaction in which the 100% owner of an S Corporation sells all stock to ESOP creates 401(k) plan for remaining employees and in effect winds up with 100% interest in ESOP ?

[RLL]

Hi Smokin ---

Have you been smokin' something?

Your scheme won't work. The ESOP doesn't qualify under IRC section 4975(e)(7) if the only covered participant is the former owner.

The "ESOP definition" regulations, at section 54.4975-11(e), and the "coverage" regulations, at section 1.410(B)-7©(2), prohibit aggregating an ESOP and a non-ESOP for purposes of satisfying the IRC section 410(B) minimum coverage requirements.

[Guest Smokin]

Hi RLL:

It's not my scheme.

Your reading of the regs seems correct. But your reply also suggests that the S corp esop works if rank and file employees are included. I would be interested in knowing if you intend to suggest that.

[RLL]

Smokin ---

If the coverage requirements are satified, the S corporation ESOP can be qualified. But note that a provision of the pending tax bill (expected to pass Congress very soon) would add restrictions on the allocations of S corporation stock under an ESOP to certain individuals. For information on this, check the web site of The ESOP Association at http://www.esopassociation.org .

[Guest Smokin]

Hi RLL:

Thanks for the heads up. Do you know if the new legistlation has a proposed retroactive effective date.

[RLL]

Smokin ---

For the latest information on this provision of the tax bill, check the web site of The ESOP Association at http://www.esopassociation.org .