Qualified Employer Securities (QES) and IRC Section 409(l)

Here is the second question on the Employee Stock Ownership Plan Review Worksheet:

October is Employee Ownership Month (EOM)

The ESOP Association issued a press release announcing the start of Employee Ownership Month in 2011.

S Corporation ESOPs Benefit Workers, Business, and the Economy

Spur U.S. retirement security, preserve and expand S-ESOPs discusses how S Corporation ESOPs are good for workers, business, and the economy:

Research: Employee Ownership has Lower Voluntary Turnover, Say in Pay Structure Improves Productivity

The August 1, 2011 Employee Ownership Update is online and discusses the following:
  • Ohio Reduces Funding for OEOC
  • Time Remains to Take NCEO's Survey on Private Company Equity Compensation Practices
  • Senators Introduce Bill That Increases Tax on Stock Options
  • Twitter to Use Private Financing to Buy Employee Shares
  • IRS Announces Adjustments to ESOP Review Process
  • New NCEO Video
The Update discusses the Employee Stock Ownership Plan Review Worksheet and how the Ohio Employee Ownership Center (OEOC) at Kent State University will adapt to the loss of state funding:

The State of Ohio has provided funding for the Ohio Employee Ownership Center (OEOC) at Kent State University since 1987. For the fiscal year starting July 1, 2011, however, due to the state's budget crisis, grant funding from the Ohio Department of Development will not be available, resulting in a substantial loss of funding for the OEOC. However, most of its funding comes from sources other than the state grant, and the OEOC says it wants to "assure the employee ownership world of our commitment and ability to maintain the Center's operations, in both the short and the long term." The OEOC will continue to operate and to encourage and facilitate the growth of employee ownership.

It also discusses a proposal that would require companies to report stock option valuations using same methodology for book and tax purposes. Stock Option Accounting Is on the Line explores this issue further.
The August 15, 2011 Employee Ownership Update is online and discusses the following:
  • Winning Workplaces: Employee Ownership Decreases Turnover
  • Republic Airlines Flight Attendants to Receive Equity Stake
  • Experimental Economics and Employee Ownership
  • Polish Coal Company IPO with Employee Stake
  • NCEO Sponsors Ownership Thinking Conference
The Update discusses the research that found that Employee Ownership Increases Job Satisfaction, Innovation, and Productivity:

Mark Harbeke's blog post Employee Skin in the Game Is Good for Business draws on data from the 342 organizations that applied for this year's Winning Workplaces award. His finding? The organizations without employee ownership had an average of 16% employee turnover in 2010, while organizations where 40% or more of employees own shares had turnover under 11%. Harbeke notes that voluntary turnover is actually at a three-year high, making retention especially important, and concludes that employee ownership is "a vehicle for both increased job satisfaction and commitment (helping to keep in check and even reduce voluntary turnover)."

It also discusses how Workplace Democracy in the Lab, a research experiment and discussion paper that explores how ownership incentives impact job performance. Do Workers With a Say on Pay Work More? reviews the experiment and findings in more detail:

"The authors contend that a vote on compensation structure acts like an incentive without altering the amount of compensation. For getting a choice between two earnings schemes with the same bottom line for the company, workers will express thanks by working harder…How much harder? Having a say hiked output by 7% and, better yet, effective output - meaning improvement in quality, not just volume — rose by 9%."

Potential Implications of Revised DOL Fiduciary Regulation

Employee Ownership Increases Job Satisfaction, Innovation, and Productivity

Employee Skin in the Game is Good for Business discusses how a review of employee engagement research has found that employee ownership increases job satisfaction, innovation, and productivity:

Still, through our employee engagement research, Winning Workplaces sees a vehicle for both increased job satisfaction and commitment (helping to keep in check and even reduce voluntary turnover) and innovation, productivity, and service improvements to boost the bottom line: employee ownership.

The discussion includes a review of the Top Small Company Workplaces 2011 applicants in terms of annual revenue, revenue growth, and employee turnover.

DOL Will Re-Propose DOL Regulation to Change the Definition of Fiduciary

On Monday the DOL announced it would Re-Propose the Proposed DOL Regulations that would make ESOP appraisers a plan fiduciary. Since last October, the ESOP community, including the ESOP Association, ESOP Appraisers, and many individual ESOP companies and professionals, hasbeen spending a lot of time and resources protesting the DOL proposed regulation and explaining the Reasons to Remove the Requirement that ESOP Appraisers are Fiduciaries from the Proposed DOL Regulations.

The ESOP Association has been a leader in the efforts. It notes in its latest blog post that, while this is good news, it isn't over yet:

Since late October 2010, The ESOP Association, and the ESOP community, has protested vigorously against the Department of Labor's (DOL) proposed regulation to make all appraisers of private ESOP company stock ERISA fiduciaries. Today, the DOL issued a press release announcing that it would issue a new version of the regulation revising the definition of ERISA fiduciaries in January 2012, and begin the comment period, in essence, all over again.

This news is a good trend line for pro-ESOP voices. On October 22, 2010, to use an analogy, when the "game" started, the ESOP community was already down two touchdowns. Today, we can say we're at half time, and we're tied going into the locker room.

But, there is still plenty of play in the months leading up to 2012 and beyond. For example, the DOL press release hints at leaving in the provision making ESOP appraisers ERISA fiduciaries when they value stock being acquired by a private company. Read the release here.

Such an outcome would dry up ESOP transactions in our view, and soon the number of ESOPs would dwindle, our voice in DC would be weaker, and ESOP benefits would be devastated.

The Wall Street Journal offered its second opinion piece on the topic in Defusing a Savings Bomb:

The U.S. economy hasn't had much good news lately, but here's one small victory: The Department of Labor yesterday withdrew a proposed rule that would have regulated out of business large swathes of the investment advisory industry and increased the cost of professional financial advice to millions of Americans…The ruckus erupted when Assistant Secretary Phyllis Borzi, the chief of the Employee Benefits Security Administration, pushed a rule to subject more financial advisers to a fiduciary standard in order to solve "conflicts of interest" within the savings advice industry that her department never defined nor quantified. As recently as a few weeks ago, Ms. Borzi wanted a final rule by early 2012.

20th Annual ESOP Economic Performance Survey (EPS)

The Employee Ownership Foundation published the results of the 20th Annual ESOP Economic Performance Survey (EPS). The survey found that ESOP companies have seen an increase in share value, productivity, and leadership support. 92% of respondents reported that creating an ESOP was a "good business decision that has helped the company" and 58% of responding companies have created an ESOP education program or ESOP advisory committee since establishing the ESOP:

WASHINGTON, Sept. 14, 2011 /PRNewswire-USNewswire/ -- Results from the Employee Ownership Foundation's 20th Annual Economic Performance Survey of ESOP (employee stock ownership plan) companies that are members of The ESOP Association show that ESOPs, while not immune to economic developments beyond their control, have seen an upturn over the past year. The survey shows ESOP companies, by significant percentages, continue to have increased share value, better productivity, and overwhelming support among leaders of the companies.

Since the survey's beginnings 20 years ago, and the case in all the years the survey has been conducted, even in 2009, a very large majority, 92.2% of survey respondents, reported that creating employee ownership through an ESOP was "a good business decision that has helped the company." In addition, 72.9% of respondents indicated the ESOP positively affected the overall productivity of the employees. In terms of profitability and revenue, both were up from previous years --- 68.1% of respondents reported profitability increased and 70.2% of respondents noted revenue increased. In terms of stock value, the majority of respondents (79.6%) stated the company's stock value increased as determined by outside independent valuations, 17.1% of the respondents reported a decline in share value, and 3.3% reported no change.

"In looking at past results, it's interesting to see performance numbers in a significant reverse of what was reported last year where so many U.S. corporations suffered financially," said Employee Ownership Foundation President, J. Michael Keeling. "It would be a shame if the Congressional bipartisan support for our modest national policy encouraging employee ownership was not enhanced as Congress looks for a 'common' ground policy encouraging U.S. based jobs."

The survey asked companies to indicate their performance in 2010 relative to 2009:

  • 67.6% indicated a better performance; 21.8% indicated a worse performance; and 10.6% indicated a nearly identical performance to the previous year
  • 70.2% indicated revenue increased; 29.8% indicated revenue decreased
  • 68.1% indicated profitability increased; 31.9% indicated profitability decreased
  • 58.3% of companies indicated they have created an ESOP education program or ESOP advisory committee since establishing the ESOP

The 2011 Economic Performance Survey was distributed to The ESOP Association's over 1,400 members in May 2011. The results are based on 486 responses, a 35% response rate.

Related Links:

S.1512: A bill to amend the Internal Revenue Code of 1986 and the Small Business Act to expand the availability of employee stock ownership plans in S corporations, and for other purposes


S.1512: A bill to amend the Internal Revenue Code of 1986 and the Small Business Act to expand the availability of employee stock ownership plans in S corporations, and for other purposes was introduced on September 6, 2011, by Sen. Benjamin Cardin [D-MD],and is currently co-sponsored by Sen. Pat Roberts [R-KS] and Sen. Olympia Snowe [R-ME]. It has been referred to the Senate Finance committee.

Qualifying Employer Securities (QES)


Here is the first question on the Employee Stock Ownership Plan Review Worksheet:

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