Employee Stock Ownership Plans (ESOPs): Legislative History Page: 3 of 5
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The Revenue Act of 1978 added new formalities to ESOPs through creation of IRC
409A.' This section, titled Qualifications for ESOPs, articulated definitions and
requirements for a plan to qualify as a "Tax Credit ESOP." 6 On a related note, the 1978
Act also formalized 401(k)s through creation of IRC 401(k). The year 1981 brought
passage of the Economic Recovery Tax Act (ERTA)." The ERTA supported ESOPs
through increasing the deduction limits applicable to employer contributions used to repay
a loan made from an ESOP. As previously noted, ESOPs also serve corporate financial
objectives that other employee benefit plans cannot, such as the ability to take out loans
from the plan. Prior to 1981, some corporations were leveraging ESOPs by combining
them with a money purchase pension plan. This had the effect of raising the deductible
limits on employer contributions from 15% to 25%. Passage of ERTA eliminated the
need for this strategy.
In the mid-1980s, the 1984 Tax Reform Act created new and substantial tax
incentives for employers maintaining ESOPs for employees.8 Notably, employers were
allowed deductions for dividends paid in cash under a qualifying ESOP.' Also, IRC
133 was created to permit qualified financial institutions to exclude 50% of the interest
on loans to ESOPs. 0 Two years later, the 1986 Tax Reform Act emphasized the
retirement objective of ESOPs by imposing a 10% penalty tax on withdrawals made prior
to age 59.5, discouraging premature withdrawals.2' The year 1988 brought certain
technical corrections to the 1986 Act, articulating what transactions qualify for deferral
of recognition of gain, clarifying that the nonallocation period begins on the date of the
sale of securities and ends on the later of 10 years or the date of the plan allocation
attributable to the final payment of acquisition indebtedness." Also, the 1988 Act
clarified the election rights of employees who were at least age 55 and had 10 years of
service to diversify their plan. This ability to diversify holds particular importance in
today's climate of stock value fluctuations.
' P.L. 95-600, 141.
"' Id. at 141(o)(3).
1" P.L. 97-34.
"8 P.L. 98-369.
1" P.L. 98-369 542, amending IRC 1042.
20 Id. at 543.
21 P.L. 99-514. This 10% tax is in addition to the normal federal income tax on distributions from
a qualified plan.
2 P.L. 100-647.
23 P.L. 100-647, 1011, amending IRC 401(a)(28).
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Employee Stock Ownership Plans (ESOPs): Legislative History, report, May 20, 2003; Washington D.C.. (digital.library.unt.edu/ark:/67531/metadc809013/m1/3/: accessed November 17, 2018), University of North Texas Libraries, Digital Library, digital.library.unt.edu; crediting UNT Libraries Government Documents Department.