ESOP Contributions Are Reimbursable Expenses
By Bill McIntyre, Article for Summer 2008 Owners at Work
August 20,2008

For many years, there have been questions regarding the inclusion of ESOP expenses as reimbursable costs for ESOP government contractors and that have cost-plus contracts. The U.S. Cost Accounting Standards Board issued final rules on May 1, 2008, clarifying the treatment of ESOP expenses in a manner that is very favorable to ESOP companies.

The questions that have existed for years are (1) the measurement of expenses for non-leveraged and leveraged ESOPs; (2) whether a contributions for interest on the ESOP note were reimbursable; (3) whether dividends paid to an ESOP that are deductible for federal income tax purposes would be a reimbursable expense; and (4) whether the contractor’s reimbursable expense should be measure in a manner similar to Statement of Accounting Position 93-6.

ESOP companies engaging in cost-plus contracts with the government were at a huge disadvantage because of uncertainties regarding their ability to be reimbursed for their ESOP expenses.
Those uncertainties have now been removed. All of those questions have been answered favorably for ESOPs.

The Cost Accounting Standards Board ruled that: (1) company ESOP contributions are reimbursable whether made in cash or stock ; (2) contributions made for both principal and interest on ESOP notes are reimbursable; (3) cash dividends paid on stock owned by the ESOP are reimbursable to the extent the dividends are used to make a payment on an ESOP note; and (4) expenses are measured by the cash or fair market value of the stock contributed, and not by the value of shares released method of SOP 93-6. There was no distinction in the rules between C and S Corp ESOPs.

The removal of the uncertainties and the favorable rules re ESOPs may encourage non-ESOP government contractors to establish ESOPs and may encourage ESOP companies who had previously avoided cost-plus contracts to seek them out in the future.

ESOP companies performing cost-plus contracts for the government should consult with their professional advisors to assess the impact of these new rules on their specific situation.