Leveraged Employee Stock Ownership Plan

The leveraged employee stock ownership plan (ESOP) has been in existence formally since 1974 when the U.S. Congress codified ERISA. ESOPs are considered to be one of the fastest growing and most visible forms of employee benefit plans in the United States. ESOPs can be traced to the concepts of Louis Kelso, who observed during the Great Depression that there were significant failures of system design that had created a situation in which large-scale productive capacity in the form of idle factories was positioned alongside consumers desperately wanting the goods those idle factories were physically capable of producing and workers equally desperate in their need for income-producing jobs. From this beginning, and with enormous political support from Senator Russell Long, the ESOP was born and became an entrenched form of pension and retirement planning mechanism with myriad benefits for participants.

This article examines the legislative history that led to the enactment of IRC 1042 and ESOPS as well as the special tax treatment accorded to this vehicle. After a general introduction to ESOPS and the underpinning ESOP philosophy, the article examines the claim that ESOPS have a clear and distinct advantage over other forms of wealth generation, specifically profit-sharing plans. References to ERISA and the IRS Code are made.

Kelso ultimately developed a strategy for income redistribution that would help to maintain wid

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This gave sponsoring employers a tax credit equal to one-half percent of payroll compensation that was paid to all participants in the PAYSOP. The primary impetus for this move was that TRASOPs were being utilized largely by capital intensive companies which Congress viewed as an overly limited application. The PAYSOP could be used by any corporation with employees. According to Gates, the 1974 Trade Act provided a preference for ESOP companies in conjunction with a loan and loan guarantee program for communities adversely impacted by foreign trade. It was in 1975 that ESOPs began to expand among large and capital intensive companies and when Congress amended the tax code to increase the investment tax credit from 7 to 10 percent. Gates states that "as part of this increase, Finance Committee Chairman Russell Long suggested that companies be allowed to claim an extra one percent investment tax credit provided the company's tax savings from this additional one percent were used to buy company stock in a ESOP meeting certain specifications unique to the tax credit ESOP (such as maximum three year vesting and a lower limit on the amount of compensation employers cold take into account in determining annual allocations to ESOP

Category: Economics - L