Who Is "Employer" In Controlled Group For ESOP?

[Guest LWYRRCM]

If you have more than one corporation in a controlled group, can you have more than one ESOP, assuming you can pass coverage tests? Can you have an ESOP at Co. 1 with stock issued by Co1, and an ESOP at Co. 2 with stock issued by Co. 2? Something tells me the definition of "employer securities" under 409(l) precludes multiple classes of stock issued by different corporations .

[Guest ESOPwizard]

I'll get the discussion going with a yes, no, or maybe answer. Do you have a real fact pattern in mind, or is this an academic question?

I'm not able to answer for every conceivable fact pattern.

It seems unlikely to me that a company would want to go through the aggevation of two ESOPs unless the owners were planning to split up

the controlled group.

[Guest Larry Goldberg]

Companies that are members of the same "controlled group of corporations" within the meaning of Section 409(l)(4) of the Code could establish separate ESOPs. You are correct that so long as the two companies are members of the same controlled group under Section 414(B) of the Code, the ESOPs' must be tested together.

The stock of any one controlled group member may serve as the Section 409(l) "employer security" for any other controlled group member. The test of the combined voting and dividend rights of a security is performed on an issuer by issuer basis, rather than on a controlled group basis. Therefore, the two companies could choose to establish one ESOP, and have the stock of one corporation allocated to the employees of both controlled group members.

Also, consider whether it makes sense from an employee benefits standpoint to allocate Company A stock to employees of Company B.

This answer assumes no member of the group is publicly-traded.

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[Guest LWYRRCM]

Not an academic question. Here's the deal: Company A has two lines of business and is currently owned

1/3 by joe, 1/3 by bill and1/3 by esop. A wants to do tax-free spin-off

of one line of business. After the spin-off, there will be Co. A and co. B in same controlled group. Since spin-off requires 80% continuity of interest, Co. B wll have to have mirror image ESOP, with stock from co. B, or else immediately after spinoff, Co. B redeems ESOP stock in Co. A for cash. Latter option is undesirable to client. Can there be 2ESOPs in same controlled group, with 2 "emploer securities"?

[Guest Larry Goldberg]

The spin-off and creation of two ESOPs would work. See my answer above. Remember, Co. A's ESOP is the recipient of the Co. B stock in the corporate spin-off. Then, the next step would be an ESOP spin-off in which the Co. A's ESOP spins off the Co. B's employees to a new Co. B ESOP. Ideally, all of the Co. B stock goes to the Co. B ESOP. But, also remember that each Co. A employee's ESOP account will have both A and B stock after the corporate spin-off. (Same with Co. B employees) So, the Trustee may need to try to internally exchange A for B stock among accounts so that A employees have A stock and B employees have B stock. In many spin-offs, this will not work out exactly. Some A employees will be left with some B stock or vice versa.

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