Wednesday, July 2, 2008

Employee Plans News - Special Edition, July 1, 2008

The IRS published Employee Plans News - Special Edition, July 1, 2008:

Sample Plan Language under Code §409(p) for the Transfer of an ESOP's S Corporation Shares

Code §409(p) was enacted as part of the Pension Protection Act of 2006. It requires that an ESOP holding S corporation stock cannot have a prohibited allocation during a nonallocation year. That is, no portion of plan assets attributable to employer securities may accrue or be allocated for the benefit of a disqualified person. Code §409(p)(3) provides that a nonallocation year occurs when disqualified persons (as defined in §409(p)(4)) own or are deemed to own 50% of the outstanding stock of the S corporation, taking into consideration synthetic equity as defined in Code §409(p)(6)(C) and Regulations §1.409(p)-1(f). During a nonallocation year, prohibited allocations are deemed to be distributed and excise taxes are imposed on the S corporation pursuant to §4979A. Additional consequences of a nonallocation year relate to plan qualification and the tax status of the corporation.

Regulation §1.409(p)-1(b)(v) provides that a nonallocation year may be prevented by transferring assets from the accounts of disqualified persons to the non-ESOP portion of the plan. Sample plan language to provide for such transfers is posted on our web site: Under this plan provision, the Plan Administrator calculates the number of shares that need to be transferred in order to prevent the occurrence of a nonallocation year. The employer needs to provide the Plan Administrator all the information needed to perform this calculation, including information on synthetic equity.

Comments on this language should be sent by August 15, 2008. However, this sample language can be used now pending the comment period.

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