Employee Ownership Legislation, 2010 Estate Tax and Step-Up in Basis Issues, ERSOPs and ROBS

Posted by Aaron Juckett, CPA, CPC, QPA, QKA on Fri, Jan 15, 2010
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The January 15, 2010 Employee Ownership Update is online and discusses the following:

  • ERSOPs?
  • Employee Ownership and Congress in 2010
  • Google and Other Tech Firms' Repricing a Boon to Employees
  • Estate Tax Changes Could Affect Sellers to ESOPs
  • NCEO Board Elections Open

Employee Ownership Legislation

The Update provides an outlook on employee ownership legislation in 2010:

Overall, the important thing to note is that of all the bills that have been introduced, there is no active legislation or, as far as we know, administration consideration of proposals to cut back on tax benefits for any kind of broad-based employee ownership plan.

The controversy over executive compensation is likely to continue, and legislation requiring say on pay seems likely, but other than that, I think it is very unlikely that Congress will do anything on employee ownership this year. With an already over-full agenda, an election year, and a focus among many legislators, pundits, and even voters on political point scoring rather than actually legislating, this seems like a very safe prediction.

All of our ESOP governmental posts can be found by accessing the legislation label and additional information about current ESOP legislation can be found on the left-hand sidebar of this Blog.

2010 Estate Tax and Step-Up In Basis Issues

Repeal of Estate Tax Creates Planning Dilemmas explores some of the 2010 estate planning issues, including the possibility that a spouse could be left with nothing if the death occurs in 2010:

Starting Jan. 1, estate taxes will be repealed for 2010 only. That means unless Congress acts otherwise, there is no limit to the wealth that can be passed on to heirs without incurring estate taxes through the end of that year.

Often, wills have been written with an expectation the estate tax structure that has been in place for years would continue, estate planners say. The wills typically direct that assets that aren't subject to estate tax be passed on to children -- for 2009, up to $3.5 million -- and that the rest go to the spouse.

"You could be in a situation now where everything would go into a trust downstream to the kids and nothing is left to the spouse," said Greg Rosica, a tax partner at Ernst and Young. "There is a need to revisit the basic estate planning documents to make sure that what you intend to have happen really does happen."

In 2011, the estate tax is scheduled to return at rates similar to those in place prior to tax cuts enacted under President George W. Bush. The one-year repeal of the tax next year has been on the books for years, but estate planners and Congress watchers had widely anticipated that congressional Democrats would prevent the repeal from taking effect.

Instead, amid disagreement over the proper level for the tax and preoccupied with health-care overhaul legislation, lawmakers punted last week and left the repeal intact -- at least for now.

The Update explores how the step-up in basis partially disappears in 2010 and how these 2010 changes could impact sellers to ESOPs:

The surprise failure by Congress to address the one-year lapse in the estate tax effective in 2010 means that if replacement securities owned by a seller to an ESOP who took a tax deferral on the sale are passed to an estate, they could be subject to capital gains taxes, at least for the portion above $1.3 million. Under the old law, estates were subject to taxation for amounts in excess of $3.5 million. But capital gains were "stepped up" on death, meaning that no capital gains taxes were due at that time and a new basis was established as of the value at the date of death. That step-up in basis partially disappears in 2010 for amounts over $1.3 million, or $4.3 million for a surviving spouse. The estate tax and step-up in basis are scheduled to return in 2011. It is possible that Congress will enact retroactive legislation to address this before 2011.

For more information on capital gains rates and the step-up in basis, check out Increasing Capital Gains Rates and Section 1042 Sales.


It also discusses employee retirement stock ownership plans (ERSOPs). ERSOPs are designed to allow the rollover of pre-tax dollars from another qualified funds from another plan into the ERSOP to fund the start-up of a company. The Update discusses some of the IRS concerns and recommends that you get a second opinion before implementing:

If a plan complies with securities laws by getting a registration exemption (there would a few ways to do this for most very small companies), providing an adequate antifraud disclosure statement (most likely including officer salaries as well as a complete discussion of risks), having at least an annual outside appraisal, performing annual discrimination testing, and otherwise complying with ERISA, these plans are allowable. It seems suspicious, however, that all of this can be done responsibly for fees anywhere close to the range these promoters are saying they charge. Independent valuations, even of very small companies, normally start at several thousand dollars, and disclosure statements are in a similar price range.

In October 2008 the IRS discussed Rollovers as Business Startups (ROBS) and provided some Guidelines regarding rollovers as business start-ups in a 15-page memorandum:

A version of a qualified plan is being marketed as a means for prospective business owners to access accumulated tax-deferred retirement funds, without paying applicable distribution taxes, in order to cover new business start-up costs. For purposes of this memorandum, these arrangements are known as Rollovers as Business Startups, or ROBS. While ROBS would otherwise serve legitimate tax and business planning needs, they are questionable in that they may serve solely to enable one individual's exchange of tax-deferred assets for currently available funds, by using a qualified plan and its investment in employer stock as a medium. This may avoid distribution taxes otherwise assessable on this exchange. Although a variety of business activity has been examined, an attribute common to this design is the assignment of newly created enterprise stock into a qualified plan as consideration for these transferred funds, the valuation of which may be Questionable...

ROBS transactions may violate law in several regards. First, this scheme might create a prohibited transaction between the plan and its sponsor. At the time of the exchange between plan assets and newly-minted employer stock, the value of the capitalization of the entity is equivalent to the value of all plan assets, when in reality, the entity may be valueless and asset-less for an indefinite period of time. Additionally, this scheme may not satisfy the benefits, rights and features requirement of the Regulations. The primary utility of the arrangement may only be available the business's principal individual.

Specific facts will need to be evaluated on a case by case basis in order to make a proper determination as to whether these plans operationally comply with established law and guidance. Technical advice requests may be submitted after consultation with group managers. For this reason, employee plans specialists are directed to resolve open ROBS cases as described herein.

The Update also provides an update on Google's 2009 decision to exchange underwater employee options.

Topics: legislation, ESOP, employee stock ownership plan

Aaron Juckett, CPA, CPC, QPA, QKA
Written by Aaron Juckett, CPA, CPC, QPA, QKA

Aaron is President and founder of ESOP Partners and provides implementation, administration, and consulting services to hundreds of companies. He is a member of The ESOP Association (TEA) and the National Center for Employee Ownership (NCEO).

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