ESOPs and Profit Sharing

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.

Kelso ultimately developed a strategy for income redistribution that would help to maintain widespread purchasing power in the economy. Kelso's argument was that the effort at income redistribution should be directed upstream rather than downstream. In other words, policymakers should emphasize not only the widespread employment of labor resources, but the widespread ownership of capital resources.

The first true ESOP was designed by Kelso in 1956 and involved the Peninsula Newspapers Incorporated ownership, whose principal shareholders owned 72 percent of the company's stock and wanted to sell their stock to the employees who did not have the funds with which to make the purchase. Kelso found a 1953 Internal Revenue Service ruling suggesting that a defined contribution empl

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d additional stimulus by increasing the one percent credit to a 1.5 percent credit. The additional one-half percent contribution to the TRASOP by the employer had to be used to match voluntary employee contributions. Later still, in the Economic Recovery Tax Act of 1981, Congress replaced TRASOP with a payroll-based plan known as PAYSOP. 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 in

Category: Economics - E