Disqualifed Persons

[Jilliandiz]

What's the definition of a "disqualifed person" in an ESOP plan?

[stephen]

Assuming you are rreferring to "disqualified person" with regards to 409(p) I provide the informaiton below:

S Corporation ESOP “Anti-Abuse” Rules (IRC §409(p))

1. EGTRRA imposes an income tax and/or an excise tax if the tax benefits of the S Corporation ESOP disproportionately benefits a group of shareholders that control the S Corporation either directly or indirectly.

2. Section 409(p) imposes an income tax on Disqualified Persons for the value of amounts allocated by the ESOP to such individuals if such allocations are made during a Non-allocation Year.

3. In addition, Section 4979A was amended to impose an excise tax on the S Corporation equal to 50% of a) the total prohibited allocations (includes current and prior year allocations) made to Disqualified Persons; and b) the total value of shares on which the Synthetic Equity owned by Disqualified Persons during the year is based.

4. These rules are generally effective for plan years beginning after December 31, 2004. However, for S Corporation ESOPs established after March 14, 2001 or for an ESOP established before such date by an employer who became an S Corporation after March 14, 2001 or for an ESOP that held no shares prior to March 14, 2001, these rules are effective immediately.

5. Definitions:

a.“Non-Allocation year” is defined as any plan year of an S Corporation ESOP in which disqualified persons own 50% or more of the number of shares of stock in the S Corporation, including Deemed-Owned shares.

b. Deemed-Owned shares include shares allocated to that person within the ESOP, as well as a pro-rata share of the unallocated shares held by the ESOP. Deemed-owned shares also include any synthetic equity held by the individual, but only if this treatment would result in his being a disqualified person or cause any year to be a Non-Allocation year.

c. A “disqualified person” is any individual who owns 1) at least 10% of the Deemed-Owned shares of the corporation or 2) at least 20% of the Deemed-Owned shares of the corporation, including shares owned by family members.