Clarification of Save At Work Proposal/409(p) Final Regulations

Clarification of Save At Work Proposal/409(p) Final Regulations
February 6, 2007

The ESOP Association published the following news bulletin on their website:

President Bush’s Proposed Budget For FY 2008 Clarifies The Presidential Panel On Federal Tax Reform “Save At Work” Proposal: Does Not Propose Elimination of ESOPs, But Leaves Questions About How ESOPs Are To Be Handled Under New “Employee Retirement Savings Accounts”

The bulletin discusses the release of the proposed 2008 budget, which also included some tax law recommendations. As the title indicates, the bulletin clarifies that while the proposal provided by the Presidential Panel on Federal Tax Reform does not propose eliminating ESOPs, many questions remain unanswered:

“The budget proposal for ERSA’s (Employee Retirement Savings Account’s) is clear that only so-called “contributory plans,” which are 401(k)’s, SIMPLE 401(k)’s, 403(b), 457, SIMPLE IRA, and SARSEPs, are to be eliminated and all are now to be covered by yet to be written law and rules for ERSA’s. [An ERSA will be very similar to a 401(k) plan with easier testing to satisfy nondiscrimination rules.]

Unless an ESOP is combined with a 401(k) plan, the ERSA proposal has no obvious impact on ESOPs.”

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We have previously discussed the final 409(p) regulations in the following posts:

IRC Section 409(p) Final Regulations

Update on 409(p) Final Regulations and Notice 2007-07

Using Rebalancing to Comply with IRC Section 409(p)

The ESOP Law Blog has a post about the final 409(p) regulations. It includes discussions on the following:

The consequences of failing 409(p), including the excise tax (to the plan sponsor), the taxable income (to the participant), the plan disqualification, and the loss of S status.
The avoidance of failing 409(p) by the transfer of shares to a non-ESOP plan or portion of the plan (that would be subject to Unrelated Business Income Tax (UBIT)).
How targeted reshuffling would most likely be discriminatory because it provides HCEs with an investment opportunity that NHCEs do not have.
The avoidance of failing 409(p) by preventing disqualified persons from sharing in allocations or by providing larger contributions to NHCE disqualified persons.
The problems with “mandating diversification” and forced elections.
Family attribution and deferred compensation plans.
The right of first refusal and synthetic equity.

Rebalancing, which we discussed in detail last week, was also discussed:

“So, while IRS is clearly opposed to targeted reshuffling, a reshuffling approach that treats all participants' accounts equally would be acceptable.”