26 U.S.C. § 409 : US Code - Section 409: Qualifications for tax credit employee stock ownership plans

Search 26 U.S.C. § 409 : US Code - Section 409: Qualifications for tax credit employee stock ownership plans

(a) Tax credit employee stock ownership plan defined
Except as otherwise provided in this title, for purposes of this
title, the term "tax credit employee stock ownership plan" means a
defined contribution plan which -
(1) meets the requirements of section 401(a),
(2) is designed to invest primarily in employer securities, and
(3) meets the requirements of subsections (b), (c), (d), (e),
(f), (g), (h), and (o) of this section.
(b) Required allocation of employer securities
(1) In general
A plan meets the requirements of this subsection if -
(A) the plan provides for the allocation for the plan year of
all employer securities transferred to it or purchased by it
(because of the requirements of section 41(c)(1)(B)) (!1) to
the accounts of all participants who are entitled to share in
such allocation, and
(B) for the plan year the allocation to each participant so
entitled is an amount which bears substantially the same
proportion to the amount of all such securities allocated to
all such participants in the plan for that year as the amount
of compensation paid to such participant during that year bears
to the compensation paid to all such participants during that
year.
(2) Compensation in excess of $100,000 disregarded
For purposes of paragraph (1), compensation of any participant
in excess of the first $100,000 per year shall be disregarded.
(3) Determination of compensation
For purposes of this subsection, the amount of compensation
paid to a participant for any period is the amount of such
participant's compensation (within the meaning of section
415(c)(3)) for such period.
(4) Suspension of allocation in certain cases
Notwithstanding paragraph (1), the allocation to the account of
any participant which is attributable to the basic employee plan
credit or the credit allowed under section 41 (!1) (relating to
the employee stock ownership credit) may be extended over
whatever period may be necessary to comply with the requirements
of section 415.
(c) Participants must have nonforfeitable rights
A plan meets the requirements of this subsection only if it
provides that each participant has a nonforfeitable right to any
employer security allocated to his account.
(d) Employer securities must stay in the plan
A plan meets the requirements of this subsection only if it
provides that no employer security allocated to a participant's
account under subsection (b) (or allocated to a participant's
account in connection with matched employer and employee
contributions) may be distributed from that account before the end
of the 84th month beginning after the month in which the security
is allocated to the account. To the extent provided in the plan,
the preceding sentence shall not apply in the case of -
(1) death, disability, separation from service, or termination
of the plan;
(2) a transfer of a participant to the employment of an
acquiring employer from the employment of the selling corporation
in the case of a sale to the acquiring corporation of
substantially all of the assets used by the selling corporation
in a trade or business conducted by the selling corporation, or
(3) with respect to the stock of a selling corporation, a
disposition of such selling corporation's interest in a
subsidiary when the participant continues employment with such
subsidiary.
This subsection shall not apply to any distribution required under
section 401(a)(9) or to any distribution or reinvestment required
under section 401(a)(28).
(e) Voting rights
(1) In general
A plan meets the requirements of this subsection if it meets
the requirements of paragraph (2) or (3), whichever is
applicable.
(2) Requirements where employer has a registration-type class of
securities
If the employer has a registration-type class of securities,
the plan meets the requirements of this paragraph only if each
participant or beneficiary in the plan is entitled to direct the
plan as to the manner in which securities of the employer which
are entitled to vote and are allocated to the account of such
participant or beneficiary are to be voted.
(3) Requirement for other employers
If the employer does not have a registration-type class of
securities, the plan meets the requirements of this paragraph
only if each participant or beneficiary in the plan is entitled
to direct the plan as to the manner in which voting rights under
securities of the employer which are allocated to the account of
such participant or beneficiary are to be exercised with respect
to any corporate matter which involves the voting of such shares
with respect to the approval or disapproval of any corporate
merger or consolidation, recapitalization, reclassification,
liquidation, dissolution, sale of substantially all assets of a
trade or business, or such similar transaction as the Secretary
may prescribe in regulations.
(4) Registration-type class of securities defined
For purposes of this subsection, the term, "registration-type
class of securities" means -
(A) a class of securities required to be registered under
section 12 of the Securities Exchange Act of 1934, and
(B) a class of securities which would be required to be so
registered except for the exemption from registration provided
in subsection (g)(2)(H) of such section 12.
(5) 1 vote per participant
A plan meets the requirements of paragraph (3) with respect to
an issue if -
(A) the plan permits each participant 1 vote with respect to
such issue, and
(B) the trustee votes the shares held by the plan in the
proportion determined after application of subparagraph (A).
(f) Plan must be established before employer's due date
(1) In general
A plan meets the requirements of this subsection only if it is
established on or before the due date (including any extension of
such date) for the filing of the employer's tax return for the
first taxable year of the employer for which an employee plan
credit is claimed by the employer with respect to the plan.
(2) Special rule for first year
A plan which otherwise meets the requirements of this section
shall not be considered to have failed to meet the requirements
of section 401(a) merely because it was not established by the
close of the first taxable year of the employer for which an
employee plan credit is claimed by the employer with respect to
the plan.
(g) Transferred amounts must stay in plan even though investment
credit is redetermined or recaptured
A plan meets the requirement of this subsection only if it
provides that amounts which are transferred to the plan (because of
the requirements of section 48(n)(1) or 41(c)(1)(B)) (!2) shall
remain in the plan (and, if allocated under the plan, shall remain
so allocated) even though part or all of the employee plan credit
or the credit allowed under section 41 (!2) (relating to employee
stock ownership credit) is recaptured or redetermined. For purposes
of the preceding sentence, the references to section 48(n)(1) (!2)
and the employee plan credit shall refer to such section and credit
as in effect before the enactment of the Tax Reform Act of 1984.
(h) Right to demand employer securities; put option
(1) In general
A plan meets the requirements of this subsection if a
participant who is entitled to a distribution from the plan -
(A) has a right to demand that his benefits be distributed in
the form of employer securities, and
(B) if the employer securities are not readily tradable on an
established market, has a right to require that the employer
repurchase employer securities under a fair valuation formula.
(2) Plan may distribute cash in certain cases
(A) In general
A plan which otherwise meets the requirements of this
subsection or of section 4975(e)(7) shall not be considered to
have failed to meet the requirements of section 401(a) merely
because under the plan the benefits may be distributed in cash
or in the form of employer securities.
(B) Exception for certain plans restricted from distributing
securities
(i) In general
A plan to which this subparagraph applies shall not be
treated as failing to meet the requirements of this
subsection or section 401(a) merely because it does not
permit a participant to exercise the right described in
paragraph (1)(A) if such plan provides that the participant
entitled to a distribution has a right to receive the
distribution in cash, except that such plan may distribute
employer securities subject to a requirement that such
securities may be resold to the employer under terms which
meet the requirements of paragraph (1)(B).
(ii) Applicable plans
This subparagraph shall apply to a plan which otherwise
meets the requirements of this subsection or section
4975(e)(7) and which is established and maintained by -
(I) an employer whose charter or bylaws restrict the
ownership of substantially all outstanding employer
securities to employees or to a trust described in section
401(a), or
(II) an S corporation.
(3) Special rule for banks
In the case of a plan established and maintained by a bank (as
defined in section 581) which is prohibited by law from redeeming
or purchasing its own securities, the requirements of paragraph
(1)(B) shall not apply if the plan provides that participants
entitled to a distribution from the plan shall have a right to
receive a distribution in cash.
(4) Put option period
An employer shall be deemed to satisfy the requirements of
paragraph (1)(B) if it provides a put option for a period of at
least 60 days following the date of distribution of stock of the
employer and, if the put option is not exercised within such 60-
day period, for an additional period of at least 60 days in the
following plan year (as provided in regulations promulgated by
the Secretary).
(5) Payment requirement for total distribution
If an employer is required to repurchase employer securities
which are distributed to the employee as part of a total
distribution, the requirements of paragraph (1)(B) shall be
treated as met if -
(A) the amount to be paid for the employer securities is paid
in substantially equal periodic payments (not less frequently
than annually) over a period beginning not later than 30 days
after the exercise of the put option described in paragraph (4)
and not exceeding 5 years, and
(B) there is adequate security provided and reasonable
interest paid on the unpaid amounts referred to in subparagraph
(A).
For purposes of this paragraph, the term "total distribution"
means the distribution within 1 taxable year to the recipient of
the balance to the credit of the recipient's account.
(6) Payment requirement for installment distributions
If an employer is required to repurchase employer securities as
part of an installment distribution, the requirements of
paragraph (1)(B) shall be treated as met if the amount to be paid
for the employer securities is paid not later than 30 days after
the exercise of the put option described in paragraph (4).
(7) Exception where employee elected diversification
Paragraph (1)(A) shall not apply with respect to the portion of
the participant's account which the employee elected to have
reinvested under section 401(a)(28)(B).
(i) Reimbursement for expenses of establishing and administering
plan
A plan which otherwise meets the requirements of this section
shall not be treated as failing to meet such requirements merely
because it provides that -
(1) Expenses of establishing plan
As reimbursement for the expenses of establishing the plan, the
employer may withhold from amounts due the plan for the taxable
year for which the plan is established (or the plan may pay) so
much of the amounts paid or incurred in connection with the
establishment of the plan as does not exceed the sum of -
(A) 10 percent of the first $100,000 which the employer is
required to transfer to the plan for that taxable year under
section 41(c)(1)(B),(!3) and
(B) 5 percent of any amount so required to be transferred in
excess of the first $100,000; and
(2) Administrative expenses
As reimbursement for the expenses of administering the plan,
the employer may withhold from amounts due the plan (or the plan
may pay) so much of the amounts paid or incurred during the
taxable year as expenses of administering the plan as does not
exceed the lesser of -
(A) the sum of -
(i) 10 percent of the first $100,000 of the dividends paid
to the plan with respect to stock of the employer during the
plan year ending with or within the employer's taxable year,
and
(ii) 5 percent of the amount of such dividends in excess of
$100,000 or
(B) $100,000.
(j) Conditional contributions to the plan
A plan which otherwise meets the requirements of this section
shall not be treated as failing to satisfy such requirements (or as
failing to satisfy the requirements of section 401(a) of this title
or of section 403(c)(1) of the Employee Retirement Income Security
Act of 1974) merely because of the return of a contribution (or a
provision permitting such a return) if -
(1) the contribution to the plan is conditioned on a
determination by the Secretary that such plan meets the
requirements of this section,
(2) the application for a determination described in paragraph
(1) is filed with the Secretary not later than 90 days after the
date on which an employee plan credit is claimed, and
(3) the contribution is returned within 1 year after the date
on which the Secretary issues notice to the employer that such
plan does not satisfy the requirements of this section.
(k) Requirements relating to certain withdrawals
Notwithstanding any other law or rule of law -
(1) the withdrawal from a plan which otherwise meets the
requirements of this section by the employer of an amount
contributed for purposes of the matching employee plan credit
shall not be considered to make the benefits forfeitable, and
(2) the plan shall not, by reason of such withdrawal, fail to
be for the exclusive benefit of participants or their
beneficiaries,
if the withdrawn amounts were not matched by employee contributions
or were in excess of the limitations of section 415. Any withdrawal
described in the preceding sentence shall not be considered to
violate the provisions of section 403(c)(1) of the Employee
Retirement Income Security Act of 1974. For purposes of this
subsection, the reference to the matching employee plan credit
shall refer to such credit as in effect before the enactment of the
Tax Reform Act of 1984.
(l) Employer securities defined
For purposes of this section -
(1) In general
The term "employer securities" means common stock issued by the
employer (or by a corporation which is a member of the same
controlled group) which is readily tradable on an established
securities market.
(2) Special rule where there is no readily tradable common stock
If there is no common stock which meets the requirements of
paragraph (1), the term "employer securities" means common stock
issued by the employer (or by a corporation which is a member of
the same controlled group) having a combination of voting power
and dividend rights equal to or in excess of -
(A) that class of common stock of the employer (or of any
other such corporation) having the greatest voting power, and
(B) that class of common stock of the employer (or of any
other such corporation) having the greatest dividend rights.
(3) Preferred stock may be issued in certain cases
Noncallable preferred stock shall be treated as employer
securities if such stock is convertible at any time into stock
which meets the requirements of paragraph (1) or (2) (whichever
is applicable) and if such conversion is at a conversion price
which (as of the date of the acquisition by the tax credit
employee stock ownership plan) is reasonable. For purposes of the
preceding sentence, under regulations prescribed by the
Secretary, preferred stock shall be treated as noncallable if
after the call there will be a reasonable opportunity for a
conversion which meets the requirements of the preceding
sentence.
(4) Application to controlled group of corporations
(A) In general
For purposes of this subsection, the term "controlled group
of corporations" has the meaning given to such term by section
1563(a) (determined without regard to subsections (a)(4) and
(e)(3)(C) of section 1563).
(B) Where common parent owns at least 50 percent of first tier
subsidiary
For purposes of subparagraph (A), if the common parent owns
directly stock possessing at least 50 percent of the voting
power of all classes of stock and at least 50 percent of each
class of nonvoting stock in a first tier subsidiary, such
subsidiary (and all other corporations below it in the chain
which would meet the 80 percent test of section 1563(a) if the
first tier subsidiary were the common parent) shall be treated
as includible corporations.
(C) Where common parent owns 100 percent of first tier
subsidiary
For purposes of subparagraph (A), if the common parent owns
directly stock possessing all of the voting power of all
classes of stock and all of the nonvoting stock, in a first
tier subsidiary, and if the first tier subsidiary owns directly
stock possessing at least 50 percent of the voting power of all
classes of stock, and at least 50 percent of each class of
nonvoting stock, in a second tier subsidiary of the common
parent, such second tier subsidiary (and all other corporations
below it in the chain which would meet the 80 percent test of
section 1563(a) if the second tier subsidiary were the common
parent) shall be treated as includible corporations.
(5) Nonvoting common stock may be acquired in certain cases
Nonvoting common stock of an employer described in the second
sentence of section 401(a)(22) shall be treated as employer
securities if an employer has a class of nonvoting common stock
outstanding and the specific shares that the plan acquires have
been issued and outstanding for at least 24 months.
(m) Nonrecognition of gain or loss on contribution of employer
securities to tax credit employee stock ownership plan
No gain or loss shall be recognized to the taxpayer with respect
to the transfer of employer securities to a tax credit employee
stock ownership plan maintained by the taxpayer to the extent that
such transfer is required under section 41(c)(1)(B),(!4) or
subparagraph (A) or (B) of section 48(n)(1).(!4)
(n) Securities received in certain transactions
(1) In general
A plan to which section 1042 applies and an eligible worker-
owned cooperative (within the meaning of section 1042(c)) shall
provide that no portion of the assets of the plan or cooperative
attributable to (or allocable in lieu of) employer securities
acquired by the plan or cooperative in a sale to which section
1042 applies may accrue (or be allocated directly or indirectly
under any plan of the employer meeting the requirements of
section 401(a)) -
(A) during the nonallocation period, for the benefit of -
(i) any taxpayer who makes an election under section
1042(a) with respect to employer securities,,,(!5)
(ii) any individual who is related to the taxpayer (within
the meaning of section 267(b)), or
(B) for the benefit of any other person who owns (after
application of section 318(a)) more than 25 percent of -
(i) any class of outstanding stock of the corporation which
issued such employer securities or of any corporation which
is a member of the same controlled group of corporations
(within the meaning of subsection (l)(4)) as such
corporation, or
(ii) the total value of any class of outstanding stock of
any such corporation.
For purposes of subparagraph (B), section 318(a) shall be applied
without regard to the employee trust exception in paragraph
(2)(B)(i).
(2) Failure to meet requirements
If a plan fails to meet the requirements of paragraph (1) -
(A) the plan shall be treated as having distributed to the
person described in paragraph (1) the amount allocated to the
account of such person in violation of paragraph (1) at the
time of such allocation,
(B) the provisions of section 4979A shall apply, and
(C) the statutory period for the assessment of any tax
imposed by section 4979A shall not expire before the date which
is 3 years from the later of -
(i) the 1st allocation of employer securities in connection
with a sale to the plan to which section 1042 applies, or
(ii) the date on which the Secretary is notified of such
failure.
(3) Definitions and special rules
For purposes of this subsection -
(A) Lineal descendants
Paragraph (1)(A)(ii) shall not apply to any individual if -
(i) such individual is a lineal descendant of the taxpayer,
and
(ii) the aggregate amount allocated to the benefit of all
such lineal descendants during the nonallocation period does
not exceed more than 5 percent of the employer securities (or
amounts allocated in lieu thereof) held by the plan which are
attributable to a sale to the plan by any person related to
such descendants (within the meaning of section 267(c)(4)) in
a transaction to which section 1042 applied.
(B) 25-percent shareholders
A person shall be treated as failing to meet the stock
ownership limitation under paragraph (1)(B) if such person
fails such limitation -
(i) at any time during the 1-year period ending on the date
of sale of qualified securities to the plan or cooperative,
or
(ii) on the date as of which qualified securities are
allocated to participants in the plan or cooperative.
(C) Nonallocation period
The term "nonallocation period" means the period beginning on
the date of the sale of the qualified securities and ending on
the later of -
(i) the date which is 10 years after the date of sale, or
(ii) the date of the plan allocation attributable to the
final payment of acquisition indebtedness incurred in
connection with such sale.
(o) Distribution and payment requirements
A plan meets the requirements of this subsection if -
(1) Distribution requirement
(A) In general
The plan provides that, if the participant and, if applicable
pursuant to sections 401(a)(11) and 417, with the consent of
the participant's spouse elects, the distribution of the
participant's account balance in the plan will commence not
later than 1 year after the close of the plan year -
(i) in which the participant separates from service by
reason of the attainment of normal retirement age under the
plan, disability, or death, or
(ii) which is the 5th plan year following the plan year in
which the participant otherwise separates from service,
except that this clause shall not apply if the participant is
reemployed by the employer before distribution is required to
begin under this clause.
(B) Exception for certain financed securities
For purposes of this subsection, the account balance of a
participant shall not include any employer securities acquired
with the proceeds of the loan described in section 404(a)(9)
until the close of the plan year in which such loan is repaid
in full.
(C) Limited distribution period
The plan provides that, unless the participant elects
otherwise, the distribution of the participant's account
balance will be in substantially equal periodic payments (not
less frequently than annually) over a period not longer than
the greater of -
(i) 5 years, or
(ii) in the case of a participant with an account balance
in excess of $800,000, 5 years plus 1 additional year (but
not more than 5 additional years) for each $160,000 or
fraction thereof by which such balance exceeds $800,000.
(2) Cost-of-living adjustment
The Secretary shall adjust the dollar amounts under paragraph
(1)(C) at the same time and in the same manner as under section
415(d).
(p) Prohibited allocations of securities in an S corporation
(1) In general
An employee stock ownership plan holding employer securities
consisting of stock in an S corporation shall provide that no
portion of the assets of the plan attributable to (or allocable
in lieu of) such employer securities may, during a nonallocation
year, accrue (or be allocated directly or indirectly under any
plan of the employer meeting the requirements of section 401(a))
for the benefit of any disqualified person.
(2) Failure to meet requirements
(A) In general
If a plan fails to meet the requirements of paragraph (1),
the plan shall be treated as having distributed to any
disqualified person the amount allocated to the account of such
person in violation of paragraph (1) at the time of such
allocation.
(B) Cross reference
For excise tax relating to violations of paragraph (1) and
ownership of synthetic equity, see section 4979A.
(3) Nonallocation year
For purposes of this subsection -
(A) In general
The term "nonallocation year" means any plan year of an
employee stock ownership plan if, at any time during such plan
year -
(i) such plan holds employer securities consisting of stock
in an S corporation, and
(ii) disqualified persons own at least 50 percent of the
number of shares of stock in the S corporation.
(B) Attribution rules
For purposes of subparagraph (A) -
(i) In general
The rules of section 318(a) shall apply for purposes of
determining ownership, except that -
(I) in applying paragraph (1) thereof, the members of an
individual's family shall include members of the family
described in paragraph (4)(D), and
(II) paragraph (4) thereof shall not apply.
(ii) Deemed-owned shares
Notwithstanding the employee trust exception in section
318(a)(2)(B)(i), an individual shall be treated as owning
deemed-owned shares of the individual.
Solely for purposes of applying paragraph (5), this
subparagraph shall be applied after the attribution rules of
paragraph (5) have been applied.
(4) Disqualified person
For purposes of this subsection -
(A) In general
The term "disqualified person" means any person if -
(i) the aggregate number of deemed-owned shares of such
person and the members of such person's family is at least 20
percent of the number of deemed-owned shares of stock in the
S corporation, or
(ii) in the case of a person not described in clause (i),
the number of deemed-owned shares of such person is at least
10 percent of the number of deemed-owned shares of stock in
such corporation.
(B) Treatment of family members
In the case of a disqualified person described in
subparagraph (A)(i), any member of such person's family with
deemed-owned shares shall be treated as a disqualified person
if not otherwise treated as a disqualified person under
subparagraph (A).
(C) Deemed-owned shares
(i) In general
The term "deemed-owned shares" means, with respect to any
person -
(I) the stock in the S corporation constituting employer
securities of an employee stock ownership plan which is
allocated to such person under the plan, and
(II) such person's share of the stock in such corporation
which is held by such plan but which is not allocated under
the plan to participants.
(ii) Person's share of unallocated stock
For purposes of clause (i)(II), a person's share of
unallocated S corporation stock held by such plan is the
amount of the unallocated stock which would be allocated to
such person if the unallocated stock were allocated to all
participants in the same proportions as the most recent stock
allocation under the plan.
(D) Member of family
For purposes of this paragraph, the term "member of the
family" means, with respect to any individual -
(i) the spouse of the individual,
(ii) an ancestor or lineal descendant of the individual or
the individual's spouse,
(iii) a brother or sister of the individual or the
individual's spouse and any lineal descendant of the brother
or sister, and
(iv) the spouse of any individual described in clause (ii)
or (iii).
A spouse of an individual who is legally separated from such
individual under a decree of divorce or separate maintenance
shall not be treated as such individual's spouse for purposes
of this subparagraph.
(5) Treatment of synthetic equity
For purposes of paragraphs (3) and (4), in the case of a person
who owns synthetic equity in the S corporation, except to the
extent provided in regulations, the shares of stock in such
corporation on which such synthetic equity is based shall be
treated as outstanding stock in such corporation and deemed-owned
shares of such person if such treatment of synthetic equity of 1
or more such persons results in -
(A) the treatment of any person as a disqualified person, or
(B) the treatment of any year as a nonallocation year.
For purposes of this paragraph, synthetic equity shall be treated
as owned by a person in the same manner as stock is treated as
owned by a person under the rules of paragraphs (2) and (3) of
section 318(a). If, without regard to this paragraph, a person is
treated as a disqualified person or a year is treated as a
nonallocation year, this paragraph shall not be construed to
result in the person or year not being so treated.
(6) Definitions
For purposes of this subsection -
(A) Employee stock ownership plan
The term "employee stock ownership plan" has the meaning
given such term by section 4975(e)(7).
(B) Employer securities
The term "employer security" has the meaning given such term
by section 409(l).
(C) Synthetic equity
The term "synthetic equity" means any stock option, warrant,
restricted stock, deferred issuance stock right, or similar
interest or right that gives the holder the right to acquire or
receive stock of the S corporation in the future. Except to the
extent provided in regulations, synthetic equity also includes
a stock appreciation right, phantom stock unit, or similar
right to a future cash payment based on the value of such stock
or appreciation in such value.
(7) Regulations and guidance
(A) In general
The Secretary shall prescribe such regulations as may be
necessary to carry out the purposes of this subsection.
(B) Avoidance or evasion
The Secretary may, by regulation or other guidance of general
applicability, provide that a nonallocation year occurs in any
case in which the principal purpose of the ownership structure
of an S corporation constitutes an avoidance or evasion of this
subsection.
(q) Cross references
(1) For requirements for allowance of employee plan credit,
see section 48(n).(!6)
(2) For assessable penalties for failure to meet requirements
of this section, or for failure to make contributions required
with respect to the allowance of an employee plan credit or
employee stock ownership credit, see section 6699.(!6)
(3) For requirements for allowance of an employee stock
ownership credit, see section 41.(!6)