The Tax Cuts and Job Act does not change legislation for Employee Stock Ownership Plans (ESOPs) but it could have some indirect effects with regards to their taxes, according to an Employee Ownership Update written by Loren Rogers, executive director of the National Center for Employee Ownership.
The tax bill limits net interest deductions for business to 30% of earnings before interest, taxes, depreciation and amortization (EBITDA) for four years, but starting in 2022, it will exclude deductions on earnings before depreciation and amortization; in other words, Rogers says, “businesses will subtract depreciation and amortization from their earnings before calculating their maximum deductible interest payments.”
Rogers says that for new leveraged ESOPs that borrow a large amount relative to its EBITDA, they “may find that their deductible expenses will be lower and, therefore, their taxable income may be higher under this change.” However, 100%-ESOP owned S corporations will not be affected because they do not pay tax, he says.
“Many questions remain on the impact of this change,” Rogers says. “Importantly, it is not yet clear whether the limit on deductibility of interest will apply to loans made after the bill goes into effect or if it will apply retroactively. It is also unclear what impact the bill will have on alternative structures, such as replacing simple interest with warrants or payment-in-kind interest.”
Because the bill reduces corporate income tax from 35% to 21%, corporate after-tax profits will rise, he says. For ESOP plans, the value of their stock will also rise, as will the size of their repurchase obligation, Rogers says. In theory, the repurchase obligation should not be a problem for C corporations since they should have more cash on hand, he says.
The situation for 100 ESOP-owned S corporations could be trickier, he says, due to the fact “their shares are appraised as if they were C corporation shares. Unlike C corporations, however, S corporations will not be generating any more cash than they had before tax reform, so they will be facing a larger repurchase obligation without a corresponding increase in cash available.”
State and local taxes
In states with higher tax rates on capital gains, sellers of businesses may want to use Section 1042 of the Internal Revenue Code, he says. This allows a company to defer federal taxation on the sale of stock to an ESOP. “If, for example, an owner in California sells $5 million in stock to a non-ESOP buyer, the seller would pay 10% of that in California taxes,” Rogers says. “The bill imposes a cap of $10,000 on the amount of state and local income taxes that can be deducted from gross income. Under pre-reform law, that $500,000 [that the seller would pay in California taxes] would have been deducted from the seller’s federal gross income, but the tax reform bill would limit that deduction to $10,000. In other words, the effective tax rate on the sale probably goes up by around $180,300 ($490,000 times the taxpayer’s marginal federal rate of 37%).”
The bill allows S corporation owners to deduct 20% of their income, Rogers continues. “The owner of an S corporation that makes $1 million in income annually would have $1 million in taxable income in 2017, but they would have $800,000 after the tax law comes into effect in 2018. That makes the S election marginally less appealing, but it may not be enough to change the calculation about being ESOP-owned or being a C or S corporation in all but a handful of cases.”
For S ESOPs that are not 100% owned, the law would reduce the required distributions by 20%. Rogers explains: “S corporations must allocate distributions pro rata to earnings. Most S corporations make distributions to non-ESOP owners so they can pay their taxes on their share of corporate profits. So, if an ESOP owns 30% of the company, it gets 30% of the distributions. These distributions now will be somewhat smaller because the non-ESOP owner will be declaring 20% less income and, therefore, requiring a smaller S distribution.”
Mercer Reveals Leadership Changes in Its Wealth and Health Hemisphere; Milwaukee Institutional Announces Boston Location Led by VP; BPOC Acquires Zenith American; and more.
Mercer has announced leadership changes for both its global wealth and health businesses.
Effective immediately, Rich Nuzum is named president of the global wealth business. Martine Ferland, president, Europe and Pacific, and Ken Haderer, president, North America, will co-lead the global health business. International MercerMarsh Benefits leader, John Deegan, will now report to Ferland. Sharon Cunninghis, head of U.S. health, will continue to report to Ken Haderer.
Nuzum, was formerly the wealth leader for Mercer’s growth markets region. Nuzum joined Mercer in Tokyo, Japan in 1992. Throughout his career, he has held leadership roles in Mercer’s retirement and investment businesses including leading Mercer’s investments business in Asia and later in North America. In this capacity, he led Mercer’s retirement and investments businesses across Africa, Asia, Latin America and the Middle East.
Milwaukee Institutional Announces Boston Location Led by VP
Milwaukee Institutional Asset Management, a division of Global Value Investment Corp., has opened an office in Boston, staffed with vice president of Advisory Services, James Geygan.
Geygan will lead the firm’s Boston office from its Canal Street location. He began his career in the financial services industry in 2012 with Wells Fargo & Co.
BPOC Aquires Zenith American
Zenith American Solutions, Inc. has announced that it has been acquired in a transaction led by Chicago-based Beecken Petty O’Keefe & Company (BPOC). BPOC acquired the company from Water Street Healthcare Partners, LLC, a strategic investor focused exclusively on the healthcare industry.
Zenith American Solutions is an independent third party administrator focused on delivering services to Taft-Hartley trust funds, trade associations, government entities, and corporate employers. BPOC is a healthcare private equity firm, focused on investments in middle-market companies poised for growth operating in the healthcare industry.
Art Schultz, CEO, Zenith American, will continue to lead the company under the new ownership structure, and he will have a seat on the BPOC board.
Harris Williams & Company and Waller Helms served as financial advisers to Zenith American in the transaction.
Past EVP Transitions to Senior VP of Retirement Strategy at Natixis
Jim Roach, formerly executive vice president and head of sales for Natixis in Canada, will be transitioning back to Boston and will be based full-time in the new Boston headquarters. Roach is expected to serve as a key member of the retirement team, as a senior vice president of retirement strategy at Natixis Investment Managers. He has been with the firm since 2002.
In this role, Roach will join Marla Skeffington (joined in June 2017) in promoting the Natixis Sustainable Future Funds to plan sponsors, advisers and consultants. Roach will primarily focus on corporations while Skeffington will concentrate on educational institutions and governments. .
MMB Hires Chief Commercial Officer Responsible for GBM Delivery Model
Mercer Marsh Benefits (MMB), a partnership between global professional services firms, Mercer and Marsh, has appointed Shakuntala Maharajh as Global Benefits Management (GBM) chief commercial officer. Maharajh will be responsible for driving the GBM operating and service delivery model for multinational clients, and will be based in Charlotte. She will work with the MMB International Leaders, John Deegan and Andrew Perry.
Prior to joining Mercer Marsh Benefits, Maharajh was at Aon Hewitt for more than 30 years where she held a variety of operational, solution, sales and technology leadership positions. She most recently served as senior vice president leading the Aon Global Benefits Solutions group. In this role, she worked with multinational clients to combine global brokerage and global benefits administration. Maharajh received her bachelor’s of science in physics from Guilford College, North Carolina. She is also a fellow in the Society of Actuaries and a member of the American Academy of Actuaries.
Symetra Modifies Team of Retirement Sales and Distribution Organization
To better meet the needs of a dynamic retirement marketplace, Symetra Life Insurance Company has announced changes to its retirement sales and distribution organization. Rich LaVoice has been named executive vice president, Retirement Distribution Strategy. Wes Severin has been promoted to senior vice president, Retirement Distribution. Andrew Farrell will take on an expanded role as vice president, national sales manager. The appointments are effective January 1, 2018.
In his new role, LaVoice will focus on expanding Symetra’s retirement distribution channels beyond the company’s traditional bank, independent broker/dealer and wirehouse relationships, while Severin will have responsibility for the division’s sales, sales operations, relationship management, product marketing and business technology teams. Both executives report to Dan Guilbert, executive vice president of Symetra’s Individual Life and Retirement Divisions. Farrell, who will lead Symetra’s internal and external sales teams, will report to Severin.
LaVoice joined Symetra in 2010 as executive vice president, Sales and Distribution. He had previously served as corporate vice president and national sales manager of Retirement Income at MassMutual Financial Group. He has specialized in selling life insurance and investment products throughout his 35-year career, holding sales leadership positions at UBS Financial Services, Inc., SunAmerica Retirement Markets, Inc., Bear Stearns & Co., and Shearson/Smith Barney. LaVoice earned a bachelor’s degree in Legal Studies from the University of Massachusetts at Amherst.
Severin joined Symetra in March 2011 as western divisional sales manager for retirement products and was promoted to vice president of national sales the following year. Prior to Symetra, Severin was national sales director of financial institution markets at Great-West Life & Annuity Insurance Company in Denver. He previously was a financial adviser with Simmers Capital Management. Severin received a bachelor’s of arts in economics from Colorado State University.
Farrell joined Symetra in 2010 as AVP, director of Retirement Sales. He was named vice president in 2011, with responsibility for retirement sales development. Farrell joined Symetra from MassMutual Financial Group, where he had most recently been director of Retirement Sales. He is a graduate of Regis University in Denver, Colorado.
Along With Buying Back Mass Company Stake, Anchor Capital Reworks Leadership Positions
Anchor Capital Advisors, a value-focused asset manager and wealth advisory firm, has announced that it is buying back a majority ownership stake of its company from Boston Private, a wealth management, trust and private banking company. After the transaction closes, Anchor employees will own 70% of the company compared to their current ownership of about 17%. The remaining 30% will be held by an affiliate of Lincoln Peak Capital, a long-term equity partner for high quality asset management firms. The move allows Anchor Capital to reclaim complete independence as the next generation management team positions the firm for future success.
In the same announcement, Anchor also confirmed that it is implementing the next steps in its succession process, which will become effective at closing. CEO and founder Bill Rice, Sr. will transition to an ongoing role as executive chairman, allowing him to remain fully engaged in Anchor’s activities. He will transition the CEO role to Bill Rice, Jr. who will also continue in his current role as CIO. In addition, Mark Bergen will assume the role of president and continue in his role as COO.
The transaction is expected to close in the first quarter of 2018 and is subject to obtaining client consents, Anchor Capital raising debt financing, and customary closing conditions.
Voya Cuts Down on Market and Insurance Risk With Investing Agreement
Voya Financial, Inc has announced that it will divest substantially all of its Closed Block Variable Annuity (CBVA) segment and its individual fixed and fixed indexed annuity business through an agreement with a consortium of investors led by affiliates of Apollo Global Management, LLC, Crestview Partners and Reverence Capital Partners. In addition to significantly reducing market and insurance risk, the agreement will enable Voya to focus on its higher-growth, higher-return, capital-light Retirement, Investment Management and Employee Benefits businesses.
Pavilion Hires Industry Expert to Join DC Practice Team
Pavilion Advisory Group, a full-service investment consulting and advisory firm, has announced that Darren Headley has joined the firm’s defined contribution (DC) practice team.
Headley will be advising retirement plan clients on plan design, fee philosophy, governance, investment policy, investment structure, and investment manager selection/monitoring.
He comes to Pavilion with close to 20 years of industry experience. He was most recently the U.S. head of Transitions for Willis Towers Watson’s OCIO investment team and also advised defined contribution and defined benefit (DB) clients from an advisory and OCIO perspective on all aspects of their retirement plans. He began his career at The Northern Trust Company and spent time at Putnam Investments. Headley earned a master’s of science in finance from Boston College, a bachelor’s of business degree in finance from Western Illinois University. He is also a CFA charterholder and is based in Chicago, Illinois.