WASHINGTON - Pension lobbyists and trade associations are working feverishly to sneak a provision into the fiscal 1998 federal budget that would expand the ability of employers to take tax deductions on company stock in employee stock ownership plans.
Employers now may take a tax deduction only if dividends on company stock held in retirement plans are used to repay the loan by the ESOP to purchase company stock, or if the dividends are paid in cash to employees.
The provision has a huge following among corporations with ESOPs or 401(k) plans that match employee contributions in company stock. It would make it simpler for hundreds of companies that must now go through hoops to claim the deductions, or force employees to take the dividends in cash.
J. Michael Keeling, president of The ESOP Association, estimates as many as 200 of the country's largest companies have KSOP programs and give employees the choice of reinvesting the dividends in the plan. "It would give them a planning opportunity," he said.
The provision is part of "The ESOP Promotion Act of 1997," legislation recently introduced by Sens. John Breaux, D-La., and Orrin Hatch, R-Utah. A companion bill was introduced last month in the House by Reps. Cass Ballanger, R-N.C., and several co-sponsors including Jim Ramstad, R-Minn., and Sander Levin, D-Mich.
Sources say the provision has a good chance of being rolled into the big "reconciliation" tax bill when lawmakers reconcile existing laws with the government's five-year spending and revenue goals to achieve a balanced budget.
Already, several members of the House Ways and Means and the Senate Finance committees have said they want the provision included in the budget package, sources said. Those two tax-writing committees will determine the fate of the ESOP legislation.
"There is this feeling that there is a window that it could be included in the budget bill," said Frank McArdle, manager of the Washington office of Hewitt Associates, the employee benefits consulting firm.
Ann L. Combs, principal in the Washington office of William M. Mercer Inc., said the legislation has a good chance of inclusion in the budget bill. "It's popular, it's got bipartisan support and it's not terribly expensive," she said.
While chances of the provision being included in the budget bill now seem fairly high, the one wild card is the price tag.
The Joint Committee of Taxation has not yet drawn up a cost for the provision. But the ESOP Association's Mr. Keeling reckons it would have a negligible cost because companies already can structure their programs to get IRS permission for taking the dividend.
He noted many employers already pay dividends on company stock to employees, who then pay income taxes on the money. The employees then reinvest the dividends into the retirement plan, and therefore can claim a tax deduction for those contributions.
The Internal Revenue Service has for years routinely given companies the green light for such "switchback" programs. But the technique has its limitations. It doesn't work for employees already putting away the maximum permitted under law into their 401(k)/ESOP plans - $9,500 in 1997. Nor does it work for top executives, whose retirement plan contributions are limited by tax laws aimed at ensuring companies provide equitable benefits for rank and file.
"Given the IRS' position, giving companies the deduction to do the same thing and lets the law make it clear it can be done," the ESOP Association's Mr. Keeling said. His Washington-based trade association is at the forefront of efforts to have the legislation included in the budget reconciliation bill.
"Dividends are leakage from the retirement system, and if you are forcing a company to pass a dividend through in order to keep deductions, that is not going to be kept in the plan for retirement purposes," said Neal M. Grossman, vice president of legal and regulatory affairs at the Association of Private Pension and Welfare Plans, another Washington trade association that is pushing hard for inclusion into the budget bill.
"It is well up on our wish list for being included this year," he said.
It is also high on the wish list of large companies, such as Exxon Corp. and Allied Signal Inc., both of which make employer matches to 401(k) plans in company stock.
Exxon's approximately $8 billion defined contribution plan, matches the first 6% of employee contributions in company stock into a KSOP. If employees direct all contributions into company stock, the company ponies up 7% on its own.
The oil company gives employees the choice of taking the dividends in cash or reinvesting them in the plan. Most employees opt to reinvest.
The company also has a mirror deferred compensation plan and lets higher-paid employees direct dividends on company stock into that plan.
Allied Signal, which offers employees a generous match to their retirement plan in company stock, is pushing for the legislation because employees don't like receiving cash dividends and "would prefer the money go back into the plan," said a company official who declined to be identified.
The company, whose employees own 11% of the 282 million outstanding shares through the $4.3 billion retirement plan, does not have a switchback program because of the paperwork and the administrative headache of keeping track of employees eligible for reinvesting dividends, the official said.
The company matches 50 cents of every dollar employees contribute up to 8% of their pay or dollar for dollar for employees with more than five years of service.