S_corps and ESOPs

[Guest sampat]

Hi,

I am looking for information as to ESOP plans and S corporations. What are the advantages and disadvantages of setting an ESOP plan for an S-corp? The stocks do not trade so how do you set up the ESOP plan. Does is provide any tax deduction? Does ESOP interfere with retirement plans?

[BeckyMiller]

Check out the web pages of the National Center for Employee Ownership (nceo.org) or The ESOP Association of America (http://www.the-esop-emplowner.org/). The ESOP Association has a seminar on S corporations coming up on March 1 in Tampa. You can register off the web page.

[Guest sampat]

Becky,

Does the 25% of Payroll tax deductibile limit for other retirement plans include ESOP contributions as part of an S-Corporation or an S-corp can set up a retirement plan with 25% of Payroll contribution in addition to ESOP?

Sampat

[BeckyMiller]

All your defined contribution plans must share the 25 percent / $30,000 ($35,000) individual allocation limits of Section 415. In addition, all such plans must be combined for the IRC Section 404 limits of 15 or 25 percent of pay, depending upon plan type. This includes ESOPs, 401(k) plans, profit sharing, money purchase pension plans, etc. Discretionary plans are generally limited to 15 percent of pay. You can hit 25 percent of pay, if you have some old contribution carryovers or if you have a defined contribution pension plan (money purchase plan). Look at IRC Sections 404(a), 404(j) and 415.

Watch new legislation, as there was a proposal last year to allow discretionary plans to go to 25 percent of pay and to disregard employee salary deferrals in calculating these limits.