Compliance October 25, 2004

House Supports Committee Version of American Jobs Creation Act Tax Bill

October 25, 2004 (PLANSPONSOR.com) - The US House of Representatives has approved a committee's compromise language on the American Jobs Creation Act tax bill, and the bill will likely pass the US Senate by the end of the year.
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>The bill contains several changes that are important to S corporation Employee Stock Ownership Plans (ESOP) and to equity compensation plans, according to a National Center for Employee Stock Ownership (NCEO) update. Under existing regulation, a leveraged ESOP in an S corporation can use distribution on unallocated ESOP shares to repay plan loans, but cannot do so for allocated shares. The new law would allow for both allocated and unallocated shares to be used in such actions.

>Also, Individual Retirement Accounts (IRA) in bank S corporations will now be owners of S corporation stock. S corporations will now be able to have 100 owners, with families counting as one owner.

>The new law also affects equity compensation. If it passes the Senate, the bill would provide support for the argument that disqualifying dispositions of stock acquired from an incentive stock options and employee stock purchase plans are no longer subject to payroll taxes.   The Internal Revenue Service (IRS) has suggested that these stock purchases be subject to tax, but has put off implementation of any such measure for the time being.

>Deferred compensation will also be affected by the bill, according to the NCEO release. Employees can currently defer the receipt of taxable vested awards under deferred compensation plans by electing to do so, but rules on how to do this are unclear. Under the new bill, employees can elect to do this if the following conditions are met:

  • The employee dies, is disabled, there is a change of control, there is an unexpected emergency, or if there is a fixed date or schedule specified by the plan.
  • The election must be made no later then the close of the preceding taxable year, or, if made in the first year of the award, within 30 days after eligibility for the award.
  • In the case of performance awards, the election must come within six months before the end of the performance period.

>No acceleration of benefits is allowed once a deferral election has been made, according to the bill, and any subsequent election for an award must be made at least 12 months after the last election, deferring receipt for at least five years in the future.

>The new law will not apply to qualified benefit plans, such as regular ESOPs or 401(k) plans, and existing rules for incentive stock option plans will not be changed by the law. The effective date is December 31, 2004. However, deferrals made after October 2, 2004, under a plan that has been materially modified after that date would be covered.

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