Capitalizing on benefits: how terminations and ESOPs can pay

Article Abstract:

Employee benefit plan financing possibilities have been altered by tax law changes. Businesses have a powerful tool for corporate financing in employee stock ownership plans (ESOPs). ESOPs can help stabilize company ownership by bringing some publicly held stock under employee control or by keeping the stock under management ownership. Companies can also gain a cash infusion by ending an over-funded defined benefit plan. There are taxes associated with such plan termination, however. In addition to paying taxes on any excess money, the company must also pay a 10 percent excise tax on the resulting windfall. The federal government is evaluating a proposal that would permit companies to withdraw excess monies from defined benefit plans without plan termination.

Employee ownership

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Tax reform increases use of 401(k) loans

Article Abstract:

The Tax Reform Act of 1986 (TRA) tightened restrictions on hardship withdrawal opportunities used in 401(k) or salary reduction savings plans. Some employers are trying to counter this negative tax reform feature by emphasizing 401(k) loan provisions, setting loan rates pegged to the prime or perhaps one or two percent above it. Such loans are especially appealing to lower wage-earners, who may have little borrowing power or savings in the case of an emergency. Plan sponsors also need to address new discrimination standards imposed under the TRA, which requires reduction in the disparity between tax deferral opportunities available to highly paid versus low and moderate income workers.

Analysis, Tax reform, Salary reduction savings plans, 401K plans, Tax shelters, Employee loans

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Act now; Congress soon may ruin appeal of leveraged ESOPs

Article Abstract:

The tax benefits of a leveraged employee stock ownership plan (LESOP) may be eliminated by Congress. Banks currently pay tax on 50% of earnings from ESOP loans and pass on the savings as lower interest rates for ESOP loans than for other corporate loans. The financing of a leveraged buyout by a LESOP permits the money used to repay the loan to be tax deductible as a contribution to an employee benefit fund.

Laws, regulations and rules, Finance, Corporations, Corporate finance, Leveraged buyouts, Employee stock options

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