As planning opportunities continue to emerge from the American Taxpayer Relief Act of 2012 (ATRA), the increase in federal income tax rates and capital gains tax rates may make qualified plans more attractive to higher wage earners.

According to a PwC HRS Insights report, there is more likelihood the compensation may be subject to tax at lower marginal rates when it is received.

There’s an ESOP aspect to the new law also. ATRA can favorably impact ESOPs in two ways.

  1. The higher capital gains tax rates can increase the value of Internal Revenue Code Section 1042. This Code Section allows sellers of stock to C corporation ESOPs to defer capital gains tax on the sale proceeds, subject to meeting certain requirements.
  2. ATRA’s income tax rate may also increase the value of the S corporation tax benefit.
    The law provides that any profits attributable to the ESOP’s ownership of stock in an S corporation are not subject to federal income tax.

For more information on ESOPs, here is a link to our ESOP Overview.