Retirement Plan Consultant
Cetera Retirement Plan Specialists
Blue Ridge ESOP Associates
(Charlottesville VA / Telecommute)
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|Question 143: If five or fewer individuals collectively own more than 50% of a corporation (exclusive of stock held in an ESOP) then is the ESOP stock excluded from the calculation to determine a controlled group? Without the ESOP four people own 80% in my situation, but when I attribute the ESOP stock and include the ESOP in the test, they only own 75%. Which way is right?|
Answer: Either way can be right, depending on whether it will create a controlled group.
Assume that Anne's account balance is 50% of the total in the ESOP. Accordingly, once we attribute ownership of ESOP stock to Anne, she has a total of 77.5% of Co. X, which is not quite enough for a controlled group. So, we go to the next step and try excluding the ESOP stock. Now Anne owns 70/85ths of the company, more than 82%. With the exclusion, a controlled group exists and so we exclude the stock.
Now, let's try a different example. Suppose we are interested in companies A and B, with the following ownership:
2,000 employees participate in the Company A 401(k) Plan and Trust, and no one participant owns more than 1% of its assets.
On these facts, without the exclusion, Company A and B are in a controlled group, because Oscar and the Trust collectively have 80% effective control and 80% controlling interest. So, we stop there. (If we were to go on and apply the exclusion, improperly, we would find that Oscar, all on his own, would have 75% of the remaining, nonexcluded stock and there would be no controlled group.)
Let's apply these principles to your question. The four shareholders in question own more than half of each company, and so exclusion is proper if it creates a controlled group. You say a controlled group exists if you ignore the ESOP stock, and otherwise it doesn't. So exclude the ESOP stock.
Answers are provided as general guidance on the subjects covered in the question and are not provided as legal advice to the questioner or to readers. Any legal issues should be reviewed by your legal counsel to apply the law to the particular facts of this and similar situations.
The law in this area changes frequently. Answers are believed to be correct as of the posting dates shown. The completeness or accuracy of a particular answer may be affected by changes in the law (statutes, regulations, rulings, court decisions, etc.) that occur after the date on which a particular Q&A is posted.