The provision would eliminate Internal Revenue Code section 404(k), an incentive for ESOP creation and operation that permits a C corporation to deduct the value of dividends paid on ESOP stock passed through to employees in cash, deductions used to pay the ESOP acquisition loan, or when the employee reinvests in more company stock in his/her ESOP account balance, according to the ESOP Association.
So far, the proposal is unclear as to how big the ESOP sponsor would have to be before this tax benefit would be denied, Marcia S. Wagner, managing director of The Wagner Law Group, told PLANSPONSOR. But she notes that the deduction was never available to S corporation ESOP sponsors, which tend to be smaller companies. “Perhaps the Administration was stung by the criticism of prior year budget proposals, which focused on S corporation sponsors,” she said.
J. Michael Keeling, ESOP Association president, said the Association is disappointed with the proposal and had no indication that the Obama Administration would introduce it. The proposal could reduce incentive to create and operate an ESOP, he said.
Wagner agrees that enactment of the latest proposal would put a damper on the formation of ESOPs by some companies. “But low dividend-paying employers should not be much affected,” she added.