ESOP & Highly Compensated Employee

[Guest James Vito Esposito]

I believe the answer to this question is a clear "yes", based on Treasury Regs and "Constructive Ownership". But added confirmation and input is appreciated...

If more than 5% of Employer Stock attributes to a particular ESOP participant in a lookback year, is that participant considered to be a "5% Owner" and thus considered a Highly Compensated Employee of the Employer sponsoring the plan?

Thanks,

Espo, QPA

[Kirk Maldonado]

Looking at this question very briefly, I think you don't have to take into account the shares in the ESOP, if you parse through all of the code sectiions.

[Belgarath]

My initial guess would have been to agree with you. However, I looked into it, and I agree with Kirk.

[Guest James Vito Esposito]

My initial guess would have been to agree with you. However, I looked into it, and I agree with Kirk.

Thanks very much... What in particular led you to conclude as such? Can you give me a citation to start with?

[Belgarath]

Sure - since stock attribution for H/C purposes is IRC 318 attribution, and 318(a)(2)(B)(i) excludes stock under an employees' trust described in 401(a) which is exempt from tax under 501(a), and an ESOP is such a trust, then I don't see that the attribution applies here. I didn't go any further than this, as it didn't seem necessary.

[Guest James Vito Esposito]

Sure - since stock attribution for H/C purposes is IRC 318 attribution, and 318(a)(2)(B)(i) excludes stock under an employees' trust described in 401(a) which is exempt from tax under 501(a), and an ESOP is such a trust, then I don't see that the attribution applies here. I didn't go any further than this, as it didn't seem necessary.

Excellent! Thanks very much...

Espo

[Guest tmills]

Sorry to join this late but does anyone have an opinion as to why even though shares owned by an individual in a 401(a) plan are ignored for purposes of computing 5% ownership (as discussed in previous posts to this thread), the total of such shares owned by the plan are included in the denominator for 5% purposes? I say that b/c 416(i) and 318 don't appear to exclude plan shares from the definition of 5% of the outstanding stock. Seems like a heck of a deal.

[R. Butler]

I understand that the ESOP shares aren't attributed to the participants, but what if voting rights pass through to the participants. Could those pass-thru voting rights push a participant into the HCE category?

[ESOP Guy]

I understand that the ESOP shares aren't attributed to the participants, but what if voting rights pass through to the participants. Could those pass-thru voting rights push a participant into the HCE category?

I have never read or heard anyone make the case that voting rights would change this. The stock in the trust just doesn't count for the 5% rule and being an HCE.

[A Shot in the Dark]

ESOP Guy is correct.

Regardless of the voting rights, the shares are owned by the trust and not the individual participants. Attribution rules do not apply.