Should S ESOPs Care About Proposed S ESOP Law Change?
A message from ESOP Association President, J. Michael Keeling.
Ever since the Chair of the House Ways and Means Committee Congressman Charles Rangel
(D-NY) introduced H.R. 3970, the “Tax Reduction and Reform Act of 2007”, containing Section 3701, which would create a new Internal Revenue Code Section 409B, the ESOP community seems to be yawning, saying “So what”.
Well, maybe I exaggerated; but compared to the legislative threats against ESOPs in the 80s and early 90s, the interest of ESOP company leaders in proposed IRC §409B seems very lukewarm.
We have to ask ourselves why? This question is certainly relevant to ask S ESOP company leaders.
(To explain to those not following legislative development, proposed IRC 409B would put very punitive taxes on persons holding what is called “synthetic equity” in an S ESOP company. Go to www.esopassociation.org for explanations under Hot Topics, and Advocacy Kit.)
Here is what I am hearing.
One, I hear S Corp leaders say, “We do not have any synthetic equity in our S ESOP company, so why should we care?”
Two, I hear, “proposed §409B grandfathers our current synthetic equity deferred comp program, why should we care?”
From my vantage point, having lobbied for good ESOP laws for over 25 years, there are both specific reasons for S ESOP companies to contact their Representatives, and general reasons for all ESOP Association members, not just our 900 S ESOP company members, to contact their Representatives to try to prevent proposed IRC§409B being endorsed by the House Ways and Means Committee.
Let me explain my view:
Even if an S ESOP company currently has no deferred compensation program tied to share value, or is “grandfathered” what if after proposed IRC §409B became law, the S ESOP company’s CEO dies, or the CFO quits, or the COO is terminated, and the S ESOP company leadership has to hire a replacement.
It is in the best interest of all the employee owners, by the way, to hire the best available person, paying what is expected to the person compared to what other employers pay for similar positions.
Let’s assume a promising young women CFO is a candidate. Let’s assume another corporation of similar size in the region also want to hire her.
The non S ESOP company can offer a good salary, an ERISA plan that defers the 415 amount of around $46,000, plus deferred compensation that might vest in five years that is tied to the company’s share value, such as a SAR, a stock option, a warrant, or bonus based on share value increases, etc.
If proposed §409B is law, the S ESOP cannot offer such a package. Oh yes, it could, if the economy co-operates and the S ESOP company has good cash flow, pay more in current compensation, or promise big annual bonuses; but, you know what, making big promises for big cash payments before someone takes the job is risky, because no matter how good a person looks on paper, until she is actually on the job, her suitability is not known, and predicting future cash flow is an art, not a science. Ask a home builder what s/he thought cash flow would be in 2008 in 2005, if you desire proof of my statement about cash flow projections not being certain.
In other words, under proposed §409B, the S ESOP is at a real disadvantage.
Do current S ESOP leaders want to tie their hands in hiring new executives compared to non S ESOP companies? I should think not.
But what is the big ESOP picture? What about those in the ESOP community that do believe in the Association’s Vision – that the number of employee owners through ESOPs grows and grows until a substantial majority of private sector employees are owners of the companies where they work?
One can surmise that enactment of proposed IRC §409B would be a bigger setback for the Association’s Vision than it is to individual S Corp ESOPs.
Why? Let me set forth reasons.
1. If the Ways and Means Committee approves proposed IRC §409B as introduced, it is an indication that the Democratic majority of the Ways and Means Committee view ESOP promotion laws suspiciously, and in need of “reform”.
2. If the Ways and Means Committee approves proposed IRC §409B as introduced, it is a clear indication that the Democratic majority of this most important Congressional Committee in Congress with regard to ESOPs is not interested at all in promoting, or expanding employee ownership through ESOPs.
3. If the Ways and Means Committee approves proposed IRC §409B as introduced, it is a clear indication that the Democratic majority of Ways and Means sees the ESOP community as weak, passive, and easy to attack in order to raise tax revenue to pay for tax beaks that the Democratic majority perceives as being for “good” guys in society, who have a more powerful voice in the nation.
4. Put 1, 2, and 3 together and the future for S ESOP law and C ESOP law is bleak as the Democratic majority of Ways and Means Committee would see no reason to favor ESOPs.
I hope the ESOP community does not sit on the sidelines while the Ways and Means Committee considers proposed IRC §409B.
My remarks are just my thoughts – they may be right; they may be wrong; they may be partially right; or they may be partially wrong.
Other thoughts are welcomed.
Comments
1. Keith+Robertson said...
Absolutely! But it is difficult getting rank and file employees to care about this. They need to understand that ESOP's must be able to attract top management talent in order to excel in their marketplace. Many of our company's top executives have been a vital part of the success we have seen over the years, especially the past decade, and I do not believe many of them would be here without additional bonus plans. In addition, I have always felt strongly that a large chunk of a top manager's salary should be tied to corporate performance and stock price, so I am all for continuing plans such as phantom stock, SAR's, etc.
Subscribe to this feed.