USING EMPLOYER STOCK IN QUALIFIED PLANS

For a number of years, the Internal Revenue Code has included special provisions for qualified plans that invest primarily in employer securities. Congress wants to encourage these plans on the premise that it is desirable to give employees some ownership interest in the company for which they work. The most important special benefit is the leveraging technique for ESOPs, described below, that allows the employer to use the ESOP as a means of financing corporate growth. There are also provisions that encourage the use of a stock plan to help create a market for employer stock.

There are two types of qualified plans that invest primarily in employer securities, the traditional stock bonus plan and the employee stock ownership plan (ESOP). In addition, a regular profit-sharing plan may invest in employer stock without limit, and profit-sharing plans are sometimes used, formally or informally, for this purpose. Qualified pension plans may not invest more than 10 percent of their assets in employer stock, so pension plans are not very useful as employer stock plans.

Advantages of Investing in Employer Stock

There are certain employer and employee advantages to any plan that invests in employer stock, including a regular profit-sharing plan, a stock bonus plan, or an ESOP.

• A market can be created for employer stock. This has many planning implications and is discussed in detail below.

• The employer can obtain a deduction for noncash (that is, employer stock) contributions to the plan.

• Employees receive an ownership interest in the company, which may act as a performance incentive.

• As described below, unrealized appreciation of stock is not taxed to the employee at the time of distribution.