Legislation to Permit More Deductions in an ESOP

[Guest wwest]

Company has unleveraged ESOP. Dividends are earned on an Employee stock account, and the company takes a tax deduction for the dividends distributed to participants.

Under new proposed legislation,the dividend distribution could include all dividends paid to company stock held by participants rather than just the employee stock account component.

Does anyone have more information on this proposal, and/or issues that affect ESOPs? What about effect on ESOP status where company stock currently makes up 55% of Plan assets?

[RLL]

The tax bills now pending in Congress (both the House and Senate versions) would amend IRC Sec. 404(k)(2)(A) to modify the deduction presently permitted for cash dividends that are "passed through" to ESOP participants. The proposed change would extend the deduction to cash dividends on employer stock if the ESOP participants are given elections to either receive the dividends in cash or to have the dividends reinvested in additional employer stock under the ESOP.

Present IRC Sec. 404(k)(2)(A) allows the deduction for all dividends on ESOP stock to the extent "passed through" to participants (or their beneficiaries). I don't understand your reference to "just the employee stock account component."

There is not necessarily any effect on "ESOP status" where company stock currently makes up 55% of plan assets. The IRC and ERISA definitions provide that an ESOP is designed to invest "primarily" in employer stock. 55% is likely to satisfy the "primarily" requirement. Is the company stock a class that constitutes "employer securities" under IRC Sec. 409(l)?

For more information on ESOPs, check the web sites of The National Center for Employee Ownership, www.nceo.org, The ESOP Association, www.esopassociation.org, and Ludwig Goldberg & Krenzel, www.lgklaw.com. (Larry Goldberg, of Ludwig Goldberg & Krenzel is the moderator of this ESOP message board).

[This message has been edited by RLL (edited 07-30-99).]