CLARIFICATION OF CERTAIN RULES RELATING TO EMPLOYEE STOCK OWNERSHIP PLANS OF S CORPORATIONS.

SEC. 1506. CLARIFICATION OF CERTAIN RULES RELATING TO EMPLOYEE STOCK OWNERSHIP PLANS OF S CORPORATIONS. (a) Certain Cash Distributions Permitted.— (1) Paragraph (2) of section 409(h) is amended by adding at the end the following new subparagraph: “(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”.111 STAT. 1065 (2) Paragraph (2) of section 409(h), as in effect before the amendment made by paragraph (1), is amended— (A) by striking “A plan which” in the first sentence and inserting the following: “(A) In general.—A plan which”, and (B) by striking the last sentence. (b) Certain Shareholder-Employees Not Treated as Owner-Employees.— (1) Amendment to 1986 code.— (A) In general.—Section 4975(f) is amended by adding at the end the following new paragraph: “(6) Exemptions not to apply to certain transactions.— “(A) In general.—In the case of a trust described in section 401(a) which is part of a plan providing contributions or benefits for employees some or all of whom are owner-employees (as defined in section 401(c)(3)), the exemptions provided by subsection (d) (other than paragraphs (9) and (12)) shall not apply to a transaction in which the plan directly or indirectly— “(i) lends any part of the corpus or income of the plan to, “(ii) pays any compensation for personal services rendered to the plan to, or “(iii) acquires for the plan any property from, or sells any property to, any such owner-employee, a member of the family (as defined in section 267(c)(4)) of any such owner-employee, or any corporation in which any such owner-employee owns, directly or indirectly, 50 percent or more of the total combined voting power of all classes of stock entitled to vote or 50 percent or more of the total value of shares of all classes of stock of the corporation. “(B) Special rules for shareholder-employees, etc.— “(i) In general.—For purposes of subparagraph (A), the following shall be treated as owner-employees: “(I) A shareholder-employee. “(II) A participant or beneficiary of an individual retirement plan (as defined in section 7701(a)(37)). “(III) An employer or association of employees which establishes such an individual retirement plan under section 408(c). “(ii) Exception for certain transactions involving shareholder-employees.—Subparagraph (A)(iii) shall not apply to a transaction which consists of a sale of employer securities to an employee stock ownership plan (as defined in subsection (e)(7)) by a shareholder-employee, a member of the family (as defined in section 267(c)(4)) of such shareholderemployee, or a corporation in which such a shareholderemployee owns stock representing a 50 percent or greater interest described in subparagraph (A). “(C) Shareholder-employee.—For purposes of subparagraph (B), the term ‘shareholder-employee’ means an employee or officer of an S corporation who owns (or 111 STAT. 1066is considered as owning within the meaning of section 318(a)(1)) more than 5 percent of the outstanding stock of the corporation on any day during the taxable year of such corporation.”. (B) Conforming amendments.—Section 4975(d) is amended— (i) by striking “The prohibitions” and inserting “Except as provided in subsection (f)(6), the prohibitions”, and (ii) by striking the last two sentences thereof. (2) Amendment to erisa.—Section 408(d) of the Employee Retirement Income Security Act of 1974 (29 U.S.C. 1108(d)) is amended to read as follows: “(d)(1) Section 407(b) and subsections (b), (c), and (e) of this section shall not apply to a transaction in which a plan directly or indirectly— “(A) lends any part of the corpus or income of the plan to, “(B) pays any compensation for personal services rendered to the plan to, or “(C) acquires for the plan any property from, or sells any property to, any person who is with respect to the plan an owner-employee (as defined in section 401(c)(3) of the Internal Revenue Code of 1986), a member of the family (as defined in section 267(c)(4) of such Code) of any such owner-employee, or any corporation in which any such owner-employee owns, directly or indirectly, 50 percent or more of the total combined voting power of all classes of stock entitled to vote or 50 percent or more of the total value of shares of all classes of stock of the corporation. “(2)(A) For purposes of paragraph (1), the following shall be treated as owner-employees: “(i) A shareholder-employee. “(ii) A participant or beneficiary of an individual retirement plan (as defined in section 7701(a)(37) of the Internal Revenue Code of 1986). “(iii) An employer or association of employees which establishes such an individual retirement plan under section 408(c) of such Code. “(B) Paragraph (1)(C) shall not apply to a transaction which consists of a sale of employer securities to an employee stock ownership plan (as defined in section 407(d)(6)) by a shareholderemployee, a member of the family (as defined in section 267(c)(4) of such Code) of any such owner-employee, or a corporation in which such a shareholder-employee owns stock representing a 50 percent or greater interest described in paragraph (1). “(3) For purposes of paragraph (2), the term ‘shareholderemployee’ means an employee or officer of an S corporation (as defined in section 1361(a)(1) of such Code) who owns (or is considered as owning within the meaning of section 318(a)(1) of such Code) more than 5 percent of the outstanding stock of the corporation on any day during the taxable year of such corporation.”. (c) Effective Date.—The amendments made by this section shall apply to taxable years beginning after December 31, 1997.111 STAT. 1067