You Don’t Have to Dress Up like a Cat or Witch to Gain Sweet Benefits

Costumes, trick-or-treating and jack-o-lanterns are all part of modern Halloween celebrations in the United States. Yet, few in the U.S. know the history of this holiday and the significance it played in early society.

Halloween traces its roots to the ancient Celtic festival of Samhain. Two-thousand years ago, the Celtics (now modern day Ireland) celebrated the New Year on November 1. The day represented the end of the harvest and the transition to winter.

The Celts believed that the boundary between the living and the dead blurred on October 31. As a result, they wore masks and costumes to appease the spirits of the dead that they believed returned to create havoc. (For those that want more detail on the history, here is a good summary.)

Much like Halloween has blurred lines, so do Employee Stock Ownership Plans (ESOPs). This blurring became evident with the very first ESOP in the United States. 

In 1956, the first ESOP was created by San Francisco lawyer and economist Louis O, Kelso. The plan was created to transition ownership of Peninsula Newspapers, Inc. to the employees as part of the owner’s succession plan. After exploring several options, it became evident to Kelso that the employees were not going to be able to acquire ownership in a traditional purchase. Best case scenario was that the employee owned company would be able to cover the interest on the debt needed to purchase the company, but would be unable to repay the principal.

Kelso noted that the company sponsored a profit sharing plan that had a large enough balance to make a 30% down payment on the purchase of the business. Further, if the plan could borrow the money for the remainder of the purchase, and then repay the debt through the annual retirement plan contribution – a sale was workable.

There was one “small” issue. The tax code at the time did not recognize ESOPs and specifically prohibited a qualified retirement plan from borrowing money. But, it did allow the possibility of an exemption from the National Office of the Internal Revenue Service. Kelso successfully obtained an exemption to the prohibited transaction rules, and the first ESOP was formed. 

This first ESOP (and all others since) effectively blurred the line between retirement savings and corporate finance. The ESOP is both, allowing a selling owner to transition ownership, while assisting employees with their retirement preparation. This blurring can benefit the selling owner, the company and the participants. 

Like Halloween, ESOPs will continue to evolve. More will be written about the ESOP evolutions in future blog posts. But, if you want to learn more about at least one Halloween evolution, you might be interested to know that in the Des Moines area, trick-or-treating is known as Beggar’s Night and actually takes place on October 30.  If you are wondering why, check out this link from the Des Moines Public Library.

In addition to blogging here, I also tweet regularly about topics of interest to ESOPs. Click to follow me on Twitter –  @jlripperger.

Affiliation Disclosures
While this communication may be used to promote or market a transaction or an idea that is discussed in the publication, it is intended to provide general information about the subject matter covered and is provided with the understanding that none of the member companies of The Principal are rendering legal, accounting, or tax advice. It is not a marketed opinion and may not be used to avoid penalties under the Internal Revenue Code. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, or accounting obligations and requirements.

Insurance products and plan administrative services are provided by Principal Life Insurance Company a member of the Principal Financial Group® (The Principal®), Des Moines, IA 50392.