September 17, 2003
On September 17th, the Senate Committee on Finance approved Chairman Charles Grassley’s (R-IA) “National Employee Savings and Trust Equity Guarantee Act of 2003 (NEST). This legislation includes an ESOP Association-endorsed amendment to permit S Corporations to use dividends (often referred to as distributions from current earnings) on both allocated and unallocated ESOP stock to pay debt incurred to acquire the employer securities for the ESOP, as is now permitted for C corporations.
The S Corporation ESOP provision reverses an IRS position, and is retroactive to January 1, 1998.
The Treasury Department had no objection to the Association-backed provision, authored by Senator Breaux (D-LA). We thank Senator Breaux, his allies, particularly Senators Hatch (R-UT) and Lincoln (D-AR), Chair Grassley, their staffs, as well as the Administration and its Treasury Department.
NEST contains many other provisions that will affect the operation of defined contribution plans, including last year’s Enron-ERISA legislation which specifically exempts stand-alone ESOPs and private company K-SOPs, from new company stock diversification rules.
The ESOP Association will continue its efforts to have current law clarified to permit S Corporation cash dividends to be paid to ESOP participants without subjecting the employee owners to a 10% penalty tax on the dividends. Current law permits cash dividends paid to C Corporation employee owners without imposition of the punitive 10% penalty.
The legislative prognosis for NEST is uncertain at this time due to controversy primarily over NEST provisions impacting defined benefit plans.