| Advantages and Disadvantages of Employee Stock Ownership Plans Advantages of ESOP TAX The corporation receives a deduction for its contributions to the ESOP that are used to pay principal and interest on the loan. For a non-leveraged ESOP, the corporation receives a deduction for contributions to the ESOP. Certain financial organizations lending to the ESOP can exclude from income 50% of the interest received on the loan. However, the availability of the partial interest exclusion is limited to situations in which the ESOP owns, immediately after the sale. The corporation receives a deduction for the dividends paid on employer securities used to repay the ESOP loan or paid to participants. A seller of nonpublic employer securities to the ESOP is not taxed on gain realized on the sale to the ESOP if specific rules are met. These rules include, among others, a requirement that the ESOP must own 30% of the corporation's stock after the sale, and the seller must purchase "qualified replacement property." This technique allows the gains from a sale to an ESOP to be rolled over into publicly held securities. Such gain is untaxed until such securities are sold. The corporation receives a tax deduction for the fair market value of employer securities contributed to the ESOP. NONTAX A leveraged ESOP may help in divesting a subsidiary or division. A leveraged ESOP may be used as an anti-takeover device. A leveraged ESOP may be used to make a tender offer to all shareholders. A leveraged ESOP may be used to facilitate a leveraged buyout. Noncallable preferred stock may be used in an ESOP if it is convertible at any time into common stock which has dividend and voting rights equal to or in excess of any other common stock of the corporation. An ESOP may help create a market for employer securities. An ESOP may help a corporation obtain equity capital for general corporate purposes, such as business expansion. An ESOP can borrow or acquire stock from related parties, such as major shareholders. An ESOP may provide an important source of compensation and retirement benefits for employees to participate in the future growth, earnings and dividends of the employer. Through proper structuring and communication, an employer may be able to reduce the costs of other benefit programs by implementing the ESOP. Issues or disadvantages of ESOPs There are numerous special rules applicable to ESOPs under the Code and ERISA, including detailed and complex loan rules. Pass-through of voting rights is required for ESOP participants under specific circumstances. An initial independent appraisal of non-publicly traded securities is required and annual independent appraisals are required thereafter. The reporting and disclosure rules of ERISA apply to ESOPs. Employee direction of investment of accounts for older employees is required generally starting when a participant attains age 55 and has 10 years of participation in the ESOP. Distributions are required to be made in employer securities and put options are required for distributions of nonpublic securities. Terminated employees may hold stock and cause problems. The sale to an ESOP of closely-held employer securities may be recharacterized as a constructive dividend. Creation of an ESOP may result in loss of control of a company by the controlling shareholder. Employee-shareholders acquire rights to information regarding the corporation, which may present a problem for closely-held businesses. The Department of Labor has begun to closely scrutinize ESOP transactions, especially with respect to the price paid by the ESOP for the stock it acquires. Future legislation can change rules and limit benefits. An ESOP must be established and maintained for the exclusive benefit of its participants and beneficiaries. |
| US 626-572-6990 |
gotprint.com
| Fairmate |