A Qualified Retirement Plan
By Dr. David Edward Marcinko; MBBS MBA CMP™
The growth over the past few decades of plans that give hospital and other corporate employees a stake in the ownership of their company has been a significant development in the area of employee compensation and corporate finance.
Though there are many forms of hospital employee ownership, the employee stock ownership plan (ESOP) has achieved widespread application.
The rapid growth in the number of ESOPs being created has important ramifications for employees, corporations, healthcare industrial complex and economy at large.
An ESOP is a special kind of qualified retirement plan in which the sponsoring employer establishes a trust to receive the contributions by the employer on behalf of participating employees. The trust then invests primarily in the stock of the sponsoring employer.
The plan’s fiduciaries are responsible for setting up individual accounts within the trust for each employee who participates, and the company’s contributions to the plan are allocated according to an established formula among the individual participants’ accounts, thus making the employees beneficial owners of the company where they work.
ESOPs Must be in Writing
Like all qualified retirement plans, ESOPs must be defined in writing.
Further, in addition to the usual rules for qualified deferred compensation plans, ESOPs must meet certain requirements of the Internal Revenue Code [IRC] with respect to voting rights on employer securities.
In general, employers that have “registration class securities” (publicly traded companies) must allow plan participants to direct the manner in which employer securities allocated to their respective accounts are to be voted on all matters.
Companies that do not have registration class securities are required to pass through voting rights to participants only on “major corporate issues.” These issues are defined as merger or consolidation, re-capitalization, reclassification, liquidation, dissolution, sale of substantially all of the assets of a trade or business of the corporation, and, under Treasury regulations, similar issues.
On other matters, such as the election of the Board of Directors, the shares may be voted by the designated fiduciary unless the plan otherwise provides.
In regard to unallocated shares held in the trust, the designated fiduciary may exercise its own discretion in voting such shares.
As owners, physicians, nurses, and hospital employees may be more motivated to improve corporate performance because they can benefit directly from company profitability. A growing company showing significant increases in the value of its stock can mean significant financial benefits for participating employees.
However, because the assets of the ESOP trust are invested primarily in the stock of one company, there is a higher degree of risk for the employee.
IRC Code § 401(a)
Until January 1, 2003 the employee did not incur FICA tax on exercised stock options. ESOPs, like all qualified deferred compensation plans, must meet certain minimum requirements spelled out in Code § 401(a) in order for the contributions to be tax deductible to the sponsoring employer.
Many employers who set up ESOPs do so not to take advantage of the very substantial tax incentives they can receive, but rather to provide their employees with a special kind of employee benefit—one with many implications for the way a company does business.
An ESOP is the only employee-benefit plan that may also be used as a technique of corporate finance.
Thus, in addition to the usual tax benefits of qualified retirement plans, studies have shown that ESOPs provide employers with significant amounts of capital, which often result in financial benefits far superior to other employee-benefit plans, while employees can share in the benefits realized through corporate financial transactions. And so, are you familiar with ESOPs and do you participate in them, when available? Why or why-not? Please comment on your experiences.
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Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com
OUR OTHER PRINT BOOKS AND RELATED INFORMATION SOURCES:
- PRACTICES: www.BusinessofMedicalPractice.com
- HOSPITALS: http://www.crcpress.com/product/isbn/9781466558731
- CLINICS: http://www.crcpress.com/product/isbn/9781439879900
- ADVISORS: www.CertifiedMedicalPlanner.org
- FINANCE: Financial Planning for Physicians and Advisors
- INSURANCE: Risk Management and Insurance Strategies for Physicians and Advisors
- Dictionary of Health Economics and Finance
- Dictionary of Health Information Technology and Security
- Dictionary of Health Insurance and Managed Care
Filed under: Retirement and Benefits |