Cash Bonus calculated based on ESOP Stock held?

[Guest DMZ]

Client wants to pay out a bonus to employees that will be based on the stock held in the ESOP. This is an S corp ESOP, 100% ESOP owned. The calculation would be basically a factor times the shares held in the ESOP, with a possible adj for new employees that have little stock. It would be a taxable cash bonus paid through payroll, and considered eligible compensation for year end ESOP allocations.

Any issues with this? My thoughts:

1) No separate class of stock issue as 100% ESOP owned.

2) Could this be considered a disguised S corp earnings distribution that would be subject the notice and consent requirements of 411(a)(11)?

3) Are there potential exclusive benefit issues here? This is like a dividend that instead of being paid to the plan is being paid to employees as current compensation. Would this be using plan assets for other than the exclusive benefit of providing retirement benefits to participants?

4) Should be no 409(p) issues as not a future payment, but a current payment.

Thanks for any input!

[BeckyMiller]

Hmmm. Interesting question. I wish I was an attorney, because I am going to start with that standard, check with legal counsel. My concern would be the risk that this payment could somehow be construed to be a dividend under state law. The reason being that a dividend is commonly defined as being a payment made based upon ownership in the company.

The IRS is generally pursuing S corporations that pay too little of regular wages. This would be a situation of paying out a dividend potentially, as wages. Yet, control over the payment is held by persons other than the recipients.... So, maybe it is wages.

Is the award to some employees who don't have stock enough to make a difference?

Could they get close enough to their desired pattern by paying out the award based upon some combination of compensation and years of service without directly acknowledging stock ownership?

The risks arise primarily if the payment is considered a dividend, not wages. I would start by getting some experienced advisor on that issue.