Appendix I. Major Federal Legislation Concerning Employee Ownership

Regional Rail Reorganization Act of 1973. Employee Stock Ownership plans (ESOPs) first mentioned in federal legislation.

Employee Retirement and Income Security Act of 1974 (ERISA) created the statutory framework for ESOPs, permitted them to borrow, and established tax deductibility of employer contributions.

The Tax Reduction Acts of 1975 and 1976, which created TRASOPs (a particular form of ESOPs, which received tax, credits and which were phased out in favor of PAYSOPS after 1981).

The Revenue Act of 1978, among other provisions, required pass-though of voting rights on ESOP stock to employees and provision of a put option (i.e. a company guarantee to repurchase stock at fair market value) when there is no public market for the stock for leveraged ESOPs.

The Small Business Ownership Act of 1980 authorized the Small Business Administration (SBA) to provide loan guarantees to ESOPs and liberalized SBA rules on loans.

The Economic Recovery Tax Act of 1981 replaced TRASOPs with PAYSOPs, another form of ESOP with tax credit (maximum annual contribution: one-half of 1% of payroll; PAYSOP tax credits were abolished in 1986), and broadened to the "put" requirement to all ESOPs.

The Deficit Reduction Act of 1984, among other provisions, deferred capital gains on sales of closely held businesses to ESOPs or co-ops (provided gains are reinvested in stock within 12 months), eliminated double taxation of dividends paid to ESOP shares, and enabled lenders to deduct 50% of interest income from loans to ESOPs.

The 1986 Tax Reform Act left the existing ESOP tax breaks in place; they became more attractive because many other corporate tax advantages were reduced or eliminated. 1986 Act added a tax benefit for estates: 50 percent of the proceeds of estate sales to ESOPs are deductible from the estate for tax purposes.

The 1989 Revenue Reconciliation Act repealed the 50% sellers tax exclusion. It also restricted commercial lending institution's eligibility for loan interest income deductions with regard to ESOP loans. It also placed a three-year waiting period to qualify for tax deferral for business owners selling 30% or more of the company to employees.

The Small Business Job Protection Act of 1996 repealed the provision that that qualified lenders to ESOPs could exclude 50 % of the interest income from ESOP loans. Employee deferrals to tax-qualified plans, such as 401(k) plans and cafeteria plans, will no longer reduce the definition of eligible pay for purposes of determining whether an individual plan participant received an excess contribution. Also as part of the Act, ESOPs will be allowed to own stock in Subchapter S corporations after December 31, 1997. To take affect December 31, 1999, contributions to defined benefit pension plans will no longer have to combined with the contributions to defined contribution plans when calculating whether a company is exceeding contribution limits for all ERISA plans.

The Taxpayer Relief Act of 1997 permits Subchapter S corporations to sponsor an ESOP. Unlike provision for C corporation, The ESOP rollover will not apply, contributions limited to 15% of pay in all plans, interest payments on ESOP loans will count toward the contribution limits, and dividends will not be deductible. The Act also made technical corrections to provisions of the Small Business Job Protection Act of 1996 that allowed S corporations to be owned by ESOPs. S corporations will not be required to offer participants the right to receive distributions in the form of employee stock. Distributions may be made in cash. The S corporation ESOP will not be subject to income tax on its share of the net income of the S corporation or on the gains realized upon the disposition of employer stock. The maximum tax rate on long-term capital gains was reduced thereby creating opportunity for increased tax savings for certain lump sum distributions of plan benefits in the form of employer stock.

Date: 2015-01-11; view: 883