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RRA '89 restricts ESOPs and qualified plans and reinstates discrimination rules

Article Abstract:

The Revenue Reconciliation Act (RRA) of 1989 amended provisions relating to employee stock ownership plans (ESOPs) and modified the rules pertaining to the required funding of defined benefit plans and health care continuation. Many ESOPs borrow to acquire stock of the sponsoring employer, and RRA 89 limits interest exclusion by tightening requirements for qualification of loans for securities acquisition. RRA '89 also imposes a new ESOP stock ownership test, a voting rights requirement, and term limits on securities acquisition loans. Other legislation repealed Section 89 of the Tax Reform Act (TRA) of 1986, in effect reinstating nondiscrimination rules in effect before enactment of TRA 86, including Section 79 group-term life insurance plan rules; Section 105(h) self-insured medical reimbursement plan provisions, and Section 129 dependent care assistance plan rules.

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Stock after spin-off is employer security for ESOP

Article Abstract:

An excise tax is imposed on reversions on a qualified plan by an employer, but not on certain reversions transferred to an employee stock ownership plan (ESOP) if the amount is used within 90 days after a transfer to invest in employer securities. Distributions to ESOP participants are taxed but do not include the unrealized appreciation in employer contributions. The IRS has held that ESOPs can own the stock of a spun-off corporation that has no relationship with the employer and can treat the stock as the employer's securities for periods exceeding 90 days without violating ESOP regulations. The spun-off corporation's ESOP is treated as a continuation of the original ESOP in regards to basis and lump-sum distribution regulations. The employees' contributions created the incremental value of the securities so no taxable event is recognized on the transfer of assets.

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Keeping corporate distributions of stock and stock rights nontaxable

Article Abstract:

Distributions of stocks and stock rights are used by corporations to make the stock easier to trade, and as an anti-takeover measure. Stock distributions by a corporation to its shareholders are treated as nontaxable events, with several exceptions. Distributions in lieu of money are taxable, as are disproportionate distributions, distributions of common and preferred stock, distributions on preferred stock, and distributions of convertible preferred stock.

Corporations

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