409(p)

[CTipper]

Maybe I've missed the boat here, but I thought S Corps could sponsor ESOPs. I've reread 409(p) several times today and each time I do I understand it a bit less.

Let's assume a one owner S Corp. This S Corp has 9 other employees. The S Corp wants to start a leveraged ESOP. And, the owner's compensation represents 35% of total eligible payroll. (9 employees at $45,000 each plus him at $225,000)

Is the owner excluded from the Plan? Or, should the owner be excluded from the plan?

Is there a contribution rate that would allow him to be in a plan?

Thanks

Christopher

[Guest tmills]

He does not have to be excluded, but that would be the cleanest way to avoid messy allocations. If he gets at least 10% of the shares in the plan, which he would because he is 35% of total compensation, he is a disqualified person, and the plan is dead. You could limit him to 9.9% (or some lower number) but why? You haven't said anything about whether they have something that could qualify as synthetic equity, but that is another minefield. If he is kept out of the plan, he can have all the synthetic equity he wants. They need to consult counsel.

[CTipper]

I haven't mentioned synthetic equity yet because I'm still dealing in the theoretical.

So, it can be done, but just limited to 9.9% of the total contribution or less. You didn't mean 9.9% of his compensation, right?

I could see how synthetic equity could be an issue when you have multiple owners, but is it really a concern if you have a 100% owner?

Christopher

[BeckyMiller]

Synthetic equity can be a huge problem if you have only one owner. Status as a disqualified person is based upon both the ESOP AND any synthetic equity. You can limit ESOP allocations and still have a disqualified person because of synthetic equity. If your controlling owner is that disqualified person, you are very likely to fail the 50 percent broadly held standard. At which point life ceases to exist as we know it.

Good luck - Becky