S Corporation Rules Involving Section 409(p)

Section 409(P) of the Code, which was enacted as part of the Economic Growth and Tax Relief reconciliation Act of 2001, sets forth anti-abuse rules for ESOPs that are maintained by S corporations.  The following is to summarize the restrictions of Section 409(P), as follows: Basic Rule:  No assets of an ESOP may be allocated (directly or indirectly) for the benefit of any Disqualified Person if, at any time during the plan year, Disqualified Persons, in the aggregate, own 50% or more of the equity of an S corporation.  Thus, the test can be broken down into two steps:  Step One — identifying the Disqualified Persons, and Step 2 — determining whether they own at least 50% of the equity. Consequences:  If an S corporation ESOP fails this test, then the result is a Non-allocation Year. If a Non-allocation Year occurs, then the plan loses its exemption from the unrelated ... Read More..

ESOP: A New Tax Savings Tool for Owners of S Corporations

“A new dawn greets ESOP companies!” “The Holy Grail of business opportunities beckons: ESOP companies can now operate tax free!” Not since 1984, when the §1042 tax-free rollover was enacted, has the ESOP community bubbled with such enthusiasm. Under the provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001, (“EGTRRA”), the ESOP’s share of S corporation earnings will not be subject to federal corporate taxation or to taxation as “unrelated business income tax,” unless the ESOP runs afoul of certain “anti-abuse” provisions. Thus, in the case of an S corporation that is 100% owned by its ESOP, the company’s earnings will be entirely tax exempt. Even the least ebullient of practitioners note that fiduciaries of existing ESOPs now confront a new obligation: to assess whether electing S status would benefit the company and the trust beneficiaries. A Bit of History Until the Small Business Job Protection Act ... Read More..

New Law on S-ESOP Prohibited Allocations

MEMORANDUM From: Legal Department Date: January 2008 Subject: Prohibited Allocations in S Corp ESOPs Section 409(p) of the Code, which was enacted as part of the Economic Growth and Tax Relief Reconciliation Act of 2001, sets forth anti-abuse rules for ESOPs that are maintained by S corporations. The following is to summarize the restrictions of Section 409(p), as follows: Basic Rule: No assets of an ESOP may be allocated (directly or indirectly) for the benefit of any Disqualified Person if, at any time during the plan year, Disqualified Persons, in the aggregate, own 50% or more of the equity of an S corporation. Thus, the test can be broken down into two steps: Step 1— identifying the Disqualified Persons, and Step 2— determining whether they own at least 50% of the equity. Consequences: If an S corporation ESOP fails this test, then the result is a Nonallocation Year. If a Nonallocation ... Read More..

Highlights Of The Pension Protection Act Of 2006

I. PROVISIONS AFFECTING ESOPS S Corp UBIT Exemption The unrelated business income tax (“UBIT”) exemption that currently applies to S corporation ESOPs, together with the related §409(p) anti-abuse provisions, have been made permanent. These provisions were scheduled to expire at the end of 2010. As the result of PPA, these provisions have been made permanent, and S corporations that sponsor ESOPs will continue to be exempt from income tax and from UBIT to the extent that company stock is held by an ESOPs. ESOP Diversification PPA does not mandate any additional diversification requirements for ESOPs maintained by private companies. Similarly, PPA does not mandate any additional diversification requirements for ESOPs maintained by public companies, provided that the ESOP is a stand-alone plan. The following additional diversification requirements do apply for plan years after December 31, 2006 if the ESOP is maintained by a public company and the ESOP is combined with a ... Read More..