Compliance January 26, 2004

S Corp ESOP Abuse Window Closed

January 26, 2004 (PLANSPONSOR.com) - On Friday the Treasury Department and the IRS issued a ruling to shut down what the agencies described as "abusive transactions involving S corporation ESOPs."
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>An employee stock ownership plan, or “ESOP,” is a type of retirement plan that invests primarily in employer stock.   Congress has allowed an “S corporation” to be owned by an ESOP, but only if the ESOP gives rank-and-file employees a meaningful stake in the S corporation.  

>According to a Treasury Department news release, when an ESOP owns an S Corporation, the profits of that corporation generally are not taxed until the ESOP makes distributions to the company’s employees when they retire or leave the job – an important tax break that allows the company to reinvest profits on a tax-deferred basis, for the ultimate benefit of employees who are ESOP participants.

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>However, Revenue Ruling 2004-4 makes these “listed transactions” for tax-shelter disclosure purposes, thus shutting down transactions that move business profits of the S corporation away from the ESOP, so that rank-and-file employees do not benefit from the arrangement. The news release notes that the ruling prohibits using stock options on a subsidiary to drain value out of the ESOP for the benefit of the S corporation’s former owners or key employees.

“Congress recognized the potential for attempts to circumvent the rules and specifically authorized Treasury and IRS to prevent it. This notice does just that, imposing a 50% excise tax on the option holders in cases where rank-and-file ESOP participants are deprived of the business profits,” stated Treasury Assistant Secretary for Tax Policy Pam Olson.

You can read MORE about the ruling at http://www.treas.gov/press/releases/reports/js1114attachment1.pdf

Benefits January 23, 2004

CA Health Care Bill Headed For Referendum

January 23, 2004 (PLANSPONSOR.com) - Calling referendums ``one of the most precious rights of our democratic process," California's 1st District Court of Appeals said the state's residents should have a right to vote on a mandatory health care proposal.
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The appellate court’s ruling is a victory for small business groups who characterized Senate Bill 2 (SB 2) as “one of the worst job-killer bills passed by the Legislature in years.” Now the coalition of groups will get to take their position to the people on a November ballot, according to a San Jose Mercury News report.

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Originally, a coalition of businesses led by the California Chamber of Commerce gathered more than 620,000 signatures for a 2004 ballot measure to overturn SB 2. But a Sacramento County Superior Court judge in December ruled that the petitions used were invalid because they did not say that small businesses would not have to provide health insurance unless state lawmakers first approve a tax credit.

The appeals court though found that while the petitions’ descriptions may be “technically imprecise” they are “fatally defective.” In this case, the law dictates that the benefit of the doubt is handed over to the referendums, the appeals court said.

Under provisions of the legislation,all companies with 200 or more workers have to offer insurance for employees and their families starting in 2005 or pay fees to support a statewide insurance program. Firms with between 20 and 199 employees will have to give workers, but not their families, insurance by 2006 or pay similar fees to the state. In most cases, companies will pay at least 80% of the monthly insurance premium, leaving workers to pay no more than 20% of the tab.

Early polls though are an ominous sign for small business groups. Sixty-five percent of California registered voters support the provisions of SB 2, although the measure was not well known among those polled. Twenty-seven percent opposed the bill, while 8% had no opinion.

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