President Bush’s Proposed Budget For FY 2008 Clarifies The Presidential Panel On Federal Tax Reform “Save At Work” Proposal:
Does Not Propose Elimination of ESOPs, But Leaves Questions About How ESOPs Are To Be Handled Under New “Employee Retirement Savings Accounts”
This morning, the White House released President Bush’s proposed budget for FY 2008, which begins October 1, 2007.
We are pleased to report that our entreaties to the Department of Treasury have resulted in a clear clarification of the Presidential Panel on Federal Tax Reform’s Recommendation that all defined contribution plans, which would include ESOPs, be replaced by what the Panel named the “Save at Work” plan.
President Bush’s budget section containing tax law recommendations, which was developed by the Treasury Department, renames the Save at Work proposal, and titles it the “Employee Retirement Savings Account,” or ERSA. The budget proposal for ERSA’s is clear that only so-called “contributory plans,” which are 401(k)’s, SIMPLE 401(k)’s, 403(b), 457, SIMPLE IRA, and SARSEPs, are to be eliminated and all are now to be covered by yet to be written law and rules for ERSA’s. [An ERSA will be very similar to a 401(k) plan with easier testing to satisfy nondiscrimination rules.]
Unless an ESOP is combined with a 401(k) plan, the ERSA proposal has no obvious impact on ESOPs.
Absent detailed proposed legislative language, however, it is unclear how an existing K-SOP would operate if the ERSA proposal became law. It seems obvious that an employer could sponsor both an ERSA plan and an ESOP, but it not clear whether the funding of the ESOP could be dependent on the contributions to the ERSA plan.
[Two other examples of non-contributory plans are stock bonus plans, and a profit sharing plan with no employee contributions to the plan.]
While it is pleasing to report that the Treasury Department and the Administration responded positively to The ESOP Association’s entreaties that the Presidential Panel recommendation to eliminate all defined contribution plans in favor of a Save at Work plan be clarified that ESOPs were not to be eliminated, the ESOP community must remain diligent in the event Congress takes up the ERSA proposal, as this opens the door for an examination of just how ESOPs fit into a world where the ERSA plan is the only contributory defined contribution plan.
As always, this office will keep you posted should Congress take up the President’s proposal.
If questions, contact Michael Keeling at 202.293.2971, or michael@esopassociation.org
Please note, this is a proposal in a proposed budget. It is not clear if Congress will consider the specific ERSA proposal. But it is pleasing to see that ESOPs are not to be folded into the new ERSA scheme.