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ESOP Legislation Stalls in Lame-Duck Congress

David Johanson

December 2000

The 106th Congress recently ended on December 16, 2000, without passing any new employee stock ownership plan ("ESOP") legislation. As a result, consideration of the Portman-Cardin bill, H.R. 1102, ended. H.R. 1102, received bipartisan support in the U.S. House of Representatives as it was approved in July of 2000 by an overwhelming margin of over 400 votes. The U.S. Senate also passed a form of H.R. 1102 with substantial bipartisan support in 1999 and the Senate Finance Committee approved the bill by a voice vote of all of its members in 2000. H.R. 1102 would have dramatically reformed the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and the qualified retirement plan provisions of the Internal Revenue Code of 1986, as amended (the "Code"), by, among other things, (1) expanding the aggregate dollar amount of contributions that may be allocated each limitation year on behalf of a participant from the lesser of 25% of "compensation" or $30,000 to the lesser of 25% of "compensation" or $40,000, (2) increasing the dollar amount of salary reduction contributions that may be made each limitation year pursuant to a 401(k) plan from $10,500 to $15,000, and (3) eliminating the "average deferral percentage" and "average contribution percentage" testing that previously controlled the disparity of contributions pursuant to a 401(k) plan for "highly compensated employees" as compared to "non-highly compensated employees." H.R. 1102 also included the Breaux-Ramstad pro-ESOP anti-abuse amendments to the 1997 S corporation ESOP law, and expansion of the ESOP dividend deduction to include reinvested dividends, which also died with the end of the 106th Congress. A few Republican Senators apparently believe that President-elect Bush will present a "better" tax bill and, therefore, stopped consideration of the Portman-Cardin bill.

Much to the disappointment of supporters of strengthening the retirement savings laws of the United States, which will become a more important objective as any "baby-boomers" retire over the next 15 to 20 years, or the ERISA laws, by having more incentives for businesses to provide ERISA plans for employees, such as ESOPs, and to encourage more funding for those plans, the 106th Congress ended December 16th without passing the so-called Portman-Cardin bill. The bill is named for its primary sponsors Congressmen Rob Portman [R-OH] and Ben Cardin [D-MD].

For ESOP companies, the failure of Portman-Cardin to become law was disappointing in a couple of major respects. First, H.R. 1102 included the "Breaux-Ramstad" anti-abuse amendment to the 1997 S corporation ESOP law instead of the very harsh proposal made by President Clinton’s Administration, which would have, effectively, repealed the benefits of that law. The S corporation ESOP law has encouraged many companies to increase the percentage of issued and outstanding capital stock held by an ESOP trust because of the very favorable federal and, oftentimes, state tax advantages of doing so. Second, H.R. 1102 included an expansion of the deduction for dividends paid on stock held by an ESOP trust to include dividends an employee voluntarily reinvested into more company stock. Although it is possible to design an ESOP to include such a provision at this time, it is now done in reliance on a number of Internal Revenue Service Private Letter Rulings and the new legislative would obviate the need to obtain such a ruling in order to proceed with this type of ESOP plan design.

The U.S. Treasury Department opposed the two ESOP provisions as included in the Portman-Cardin bill, but claimed to be willing to accept both with requested amendments. This opposition, plus its opposition to other provisions of the Portman-Cardin bill related to various ERISA contribution and allocation limits, apparently played a role in stopping a last minute passage of the legislation in the December 11th to 15th timeframe.

It appears that the real reason that the Portman-Cardin bill did not pass at the end of the 106th Congress, however, was that several Republican Senators opposed its passage this year as they believe that in 2001 President Bush will develop a "better" tax cut bill. It is impossible to predict how the Bush Administration will respond to ESOPs and the bigger issues of ERISA and tax reform. This is something that ESOP companies will have to monitor in 2001 and beyond. It also is important to remember that positive developments have occurred in the past with respect to pro-ESOP legislation as a result of grass roots efforts of ESOP companies and their employee-owners. This column will attempt to update its readers as major developments occur.

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