New ESOP Bill Intends to Improve Plan Operation

June 30, 2005 ( - US Senator Blanche Lincoln (D-Arkansas) has introduced the Employee Stock Ownership Plan Promotion and Improvement Act of 2005 (S 1319) designed "to improve the operation of employee stock ownership plans," as stated in the bill.

The bill is an amendment to several sections of the Internal Revenue Code, including, as noted in a news report, Section 72(t)(2)(A), adding certain S corporation distributions made on employer stock held by ESOPs to the list of distributions exempt from a 10% penalty tax.

Other provisions of the bill include:

  • an exception for dividends paid on employer securities held by an ESOP established after a certain time to the disallowance of items not deductible in computing earnings and profits.   This amendment applies to tax years beginning with 1990 and participants would have one year following enactment of the bill to apply for any tax credits or refunds.
  • a deferral of tax for certain sales to ESOPs sponsored by an S corporation
  • permission to reinvest proceeds of sales into certain mutual funds
  • elimination of the 10% penalty tax on early distributions from ESOPs if the distributions are used to cover higher education expenses or first-time homebuyer purchases
  • a de minimis exception (for account balances less than $2,500) to the ESOP  diversification requirements .

You can view the proposed bill  here .

-Rebecca Moore