Qualifications for tax credit employee stock ownership plans

meets the requirements of section 401(a), is designed to invest primarily in employer securities, and meets the requirements of subsections (b), (c), (d), (e), (f), (g), (h), and (o) of this section. 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)) 11 See References in Text note below. to the accounts of all participants who are entitled to share in such allocation, and 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. For purposes of paragraph (1), compensation of any participant in excess of the first $100,000 per year shall be disregarded. 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. 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. 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. death, disability, separation from service, or termination of the plan; 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 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. A plan meets the requirements of this subsection if it meets the requirements of paragraph (2) or (3), whichever is applicable. 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. 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. a class of securities required to be registered under section 12 of the Securities Exchange Act of 1934, and 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. the plan permits each participant 1 vote with respect to such issue, and the trustee votes the shares held by the plan in the proportion determined after application of subparagraph (A). 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. 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. 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)) 1 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 1 (relating to employee stock ownership credit) is recaptured or redetermined. For purposes of the preceding sentence, the references to section 48(n)(1) 1 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. has a right to demand that his benefits be distributed in the form of employer securities, and 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. 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. 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). 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 an S corporation. 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. 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). 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 there is adequate security provided and reasonable interest paid on the unpaid amounts referred to in subparagraph (A). 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). 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) or subparagraph (B) or (C) of section 401(a)(35). 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),1 and 5 percent of any amount so required to be transferred in excess of the first $100,000; and 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 5 percent of the amount of such dividends in excess of $100,000 or $100,000. the contribution to the plan is conditioned on a determination by the Secretary that such plan meets the requirements of this section, 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 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. 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 the plan shall not, by reason of such withdrawal, fail to be for the exclusive benefit of participants or their beneficiaries, 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. that class of common stock of the employer (or of any other such corporation) having the greatest voting power, and that class of common stock of the employer (or of any other such corporation) having the greatest dividend rights. 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. 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). 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. 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. 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. 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),1 or subparagraph (A) or (B) of section 48(n)(1).1 any taxpayer who makes an election under section 1042(a) with respect to employer securities, any individual who is related to the taxpayer (within the meaning of section 267(b)), or 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 the total value of any class of outstanding stock of any such corporation. 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, the provisions of section 4979A shall apply, and the 1st allocation of employer securities in connection with a sale to the plan to which section 1042 applies, or the date on which the Secretary is notified of such failure. such individual is a lineal descendant of the taxpayer, and 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. at any time during the 1-year period ending on the date of sale of qualified securities to the plan or cooperative, or on the date as of which qualified securities are allocated to participants in the plan or cooperative. the date which is 10 years after the date of sale, or the date of the plan allocation attributable to the final payment of acquisition indebtedness incurred in connection with such sale. in which the participant separates from service by reason of the attainment of normal retirement age under the plan, disability, or death, or 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. 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. 5 years, or 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. 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). 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. 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. For excise tax relating to violations of paragraph (1) and ownership of synthetic equity, see section 4979A. such plan holds employer securities consisting of stock in an S corporation, and disqualified persons own at least 50 percent of the number of shares of stock in the S corporation. in applying paragraph (1) thereof, the members of an individual’s family shall include members of the family described in paragraph (4)(D), and paragraph (4) thereof shall not apply. 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. 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 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. 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). 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 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. 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. the spouse of the individual, an ancestor or lineal descendant of the individual or the individual’s spouse, a brother or sister of the individual or the individual’s spouse and any lineal descendant of the brother or sister, and the spouse of any individual described in clause (ii) or (iii). the treatment of any person as a disqualified person, or the treatment of any year as a nonallocation year. The term “employee stock ownership plan” has the meaning given such term by section 4975(e)(7). The term “employer security” has the meaning given such term by section 409(l). 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. The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this subsection. 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. The amendments made by this section [amending this section and sections 4975 and 4979A of this title] shall apply to plan years beginning after December 31, 2004. employee stock ownership plan established after March 14, 2001, or employee stock ownership plan established on or before such date if employer securities held by the plan consist of stock in a corporation with respect to which an election under section 1362(a) of the Internal Revenue Code of 1986 is not in effect on such date, Except as provided in clause (ii), the amendments made by this paragraph [amending this section and section 1042 of this title] shall apply to sales of securities after the date of the enactment of this Act [Oct. 22, 1986]. A taxpayer or executor may elect to have section 1042(b)(3) of the Internal Revenue Code of 1954 (as in effect before the amendment made by subparagraph (B)) apply to sales before the date of the enactment of this Act as if such section included the last sentence of section 409(n)(1) of the Internal Revenue Code of 1986 (as added by subparagraph (A)).” The amendments made by paragraph (1)(A) and (3) [amending this section and sections 1042 and 4975 of this title] shall take effect on the date of the enactment of this Act [Oct. 22, 1986].” Except as otherwise provided in this subsection and subsection (h) [set out as an Effective Date of 1978 Amendment note under section 4975 of this title], the amendments made by this section [enacting sections 409A [now 409] and 6699 of this title and amending sections 46, 48, 56, 401, 404, 415, 805, 1504, and 4975 of this title] shall apply with respect to qualified investment for taxable years beginning after December 31, 1978. At the election of the taxpayer, paragraph (1) shall be applied by substituting ‘December 31, 1977’ for ‘December 31, 1978’; except that in the case of a plan in existence before December 31, 1978, any such election shall not affect the required allocation of employer securities attributable to qualified investment for taxable years beginning before January 1, 1979. An election under the preceding sentence shall be made at such time and in such manner as the Secretary of the Treasury or his delegate shall prescribe. Such an election, once made, shall be irrevocable. Section 409A(e) of the Internal Revenue Code of 1986 [formerly I.R.C. 1954] (as added by subsection (a)) [now section 409] shall apply to plans to which section 409A of such Code applies, beginning with the first day of such application. Paragraphs (1)(A) and (2) of section 409A(h) of the Internal Revenue Code of 1986 (as added by subsection (a)) [now section 409] shall apply to distributions after December 31, 1978, made by a plan to which section 409A of such Code applies. The amendment made by subsection (f)(7) [amending section 415 of this title] shall apply to years beginning after December 31, 1978. In determining the regular tax deduction under [former] section 56(c) of the Internal Revenue Code of 1986 for any taxable year beginning before January 1, 1979, the amount of the credit allowable under section 38 of such Code shall be determined without regard to section 46(a)(2)(B) of such Code (as in effect before the enactment of the Energy Tax Act of 1978 [Nov. 9, 1978]).” 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— A plan meets the requirements of this subsection if— 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— For purposes of this subsection, the term, “registration-type class of securities” means— A plan meets the requirements of paragraph (3) with respect to an issue if— A plan meets the requirements of this subsection if a participant who is entitled to a distribution from the plan— 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— 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 plan which otherwise meets the requirements of this section shall not be treated as failing to meet such requirements merely because it provides that— 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— 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— the sum of— 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— Notwithstanding any other law or rule of law— For purposes of this section— 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 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))— during the nonallocation period, for the benefit of— for the benefit of any other person who owns (after application of section 318(a)) more than 25 percent of— If a plan fails to meet the requirements of paragraph (1)— 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— For purposes of this subsection— Paragraph (1)(A)(ii) shall not apply to any individual if— A person shall be treated as failing to meet the stock ownership limitation under paragraph (1)(B) if such person fails such limitation— The term “nonallocation period” means the period beginning on the date of the sale of the qualified securities and ending on the later of— A plan meets the requirements of this subsection if— 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— 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— For purposes of this subsection— The term “nonallocation year” means any plan year of an employee stock ownership plan if, at any time during such plan year— For purposes of subparagraph (A)— The rules of section 318(a) shall apply for purposes of determining ownership, except that— For purposes of this subsection— The term “disqualified person” means any person if— The term “deemed-owned shares” means, with respect to any person— For purposes of this paragraph, the term “member of the family” means, with respect to any individual— 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— For purposes of this subsection— In the case of any— (Source: (Added Pub. L. 95–600, title I, § 141(a), Nov. 6, 1978, 92 Stat. 2787, § 409A; amended Pub. L. 96–222, title I, § 101(a)(7)(D)–(F), (I), (J), (L)(i)(VI), (ii)(I), (II), (iii)(V), (v)(VI), (VII), Apr. 1, 1980, 94 Stat. 198–200; Pub. L. 96–605, title II, § 224(a), Dec. 28, 1980, 94 Stat. 3528; Pub. L. 97–34, title III, §§ 331(c)(1), 334, 336, 337(a), Aug. 13, 1981, 95 Stat. 293, 297, 298; Pub. L. 97–448, title I, § 103(h), (i), Jan. 12, 1983, 96 Stat. 2379; renumbered § 409 and amended Pub. L. 98–369, div. A, title IV, §§ 474(r)(15), 491(e)(1), July 18, 1984, 98 Stat. 843, 852; Pub. L. 99–514, title XI, §§ 1172(b)(1), 1174(a)(1), (b)(1), (2), (c)(1)(A), 1176(b), title XVIII, §§ 1852(a)(4)(B), 1854(a)(3)(A), (f)(1), (3)(C), 1899A(11), Oct. 22, 1986, 100 Stat. 2514, 2516, 2517, 2520, 2865, 2873, 2881, 2882, 2958; Pub. L. 100–647, title I, §§ 1011B(g)(1), (2), (i)(1), (3), (j)(3), (5), (k)(3), 1018(t)(4)(B), (C), (H), Nov. 10, 1988, 102 Stat. 3490, 3492, 3493, 3588, 3589; Pub. L. 101–239, title VII, §§ 7304(a)(2)(A), (B), 7811(h)(1), Dec. 19, 1989, 103 Stat. 2352, 2353, 2409; Pub. L. 105–34, title XV, § 1506(a), Aug. 5, 1997, 111 Stat. 1064; Pub. L. 107–16, title VI, § 656(a), June 7, 2001, 115 Stat. 131; Pub. L. 107–147, title IV, § 411(j)(2), Mar. 9, 2002, 116 Stat. 47; Pub. L. 109–280, title IX, § 901(a)(2)(B), Aug. 17, 2006, 120 Stat. 1029; Pub. L. 113–295, div. A, title II, § 221(a)(54), Dec. 19, 2014, 128 Stat. 4045; Pub. L. 115–141, div. U, title IV, § 401(a)(79), Mar. 23, 2018, 132 Stat. 1187.))