Outside Publication

IRC Section 409(p) and S Corporation ESOPs, New York University Review of Employee Benefits and Executive Compensation


“Internal Revenue Code (“Code”) section 409(p)” is a phrase that routinely strikes fear in the heart of each and every S corporation that maintains an employee stock ownership plan (“ESOP”).

The reason for this is that, to run afoul of this particular Code section means tax penalties so extreme that a company could be gravely harmed economically, perhaps even taxed out of existence, if the IRS were to strictly enforce all of its regulatory rights for violating this Code section. However, Code section 409(p) should not be a concern for most S corporations that sponsor an ESOP, as this article will point out, provided the testing required by this rule is being handled properly and proper planning is being performed on a regular basis.