Current State of Employee Ownership

View of Employee Ownership from the Hill covers some reasons to be excited about employee ownership, including the Employee Ownership Fellowship Program, the Employee Ownership Award and First Professorship in Employee Ownership, and the Curriculum Library on Employee Ownership (CLEO). It notes that there have not been any negative ESOP proposals in the Obama budget and no recent indications of negative legislation. However, it also discusses the work that still needs to be done to get Washington to include employee ownership in the public policy conversation:

It just goes to show that we still have far to go. Yes, there are many great projects focusing on employee ownership in the works and we are proud of what we have accomplished so far, but making in roads with members of Congress, their staffs, and thought leaders of national media, academia, and think tanks is still a challenge this community needs to focus on.

IRS Will Continue to Litigate Deductible Redemptive Dividends

The IRS has stated that it will continue to pursue deductible redemptive dividends (e.g. General Mills, Inc. and Ralston Purina Co.):

"we are litigating these cases" and "we are not settling them"

Circuits Split on Deductibility of Proceeds From Stock Redemption Used to Satisfy ESOP Distribution Obligations discusses the circuit split between the Eighth Circuit (General Mills, Inc. v. United States, No. 08-1638 (8th Cir., January 26, 2009)) and the Ninth Circuit (Boise Cascade Corp. v. U.S. (9th Cir., No. 01-36086, 5/20/03)). The split is on whether or not a corporation is entitled to a deduction under IRC Section 404(k) - Deduction for dividends paid on certain employer securities for the proceeds from a stock redemption that were used to fund cash distributions. It also notes that the IRS's intent to continue to litigate may mean that the Supreme Court will eventually need to decide this issue.

Brief of the ERISA Industry Committee, The Grocery Maufacturers Association, The National Association of Manufacturers and the Organization for International Investment in Support of Appellee's Petition for Rehearing En Banc is an amicus brief that supports a rehearing of the case en banc.

Updated Employee Ownership 100/LinkedIn

The latest NCEO Employee Ownership 100 is now online.

As you may have seen in our left -hand side bar, you can follow the One-Stop ESOP Blog on LinkedIn by joining The One-Stop ESOP Blog Group. You may also be interested in the NCEO's LinkedIn Group, the NCEO Employee Stock Ownership Network.

Southwest Airlines Employee Ownership Culture

We recently mentioned Southwest Airlines when discussing a Different Way to Quantify Your Ownership Culture. Southwest Airlines President Emeritus Colleen Barrett on the Power of an Ownership Culture discusses how employee ownership, Open-Book Management, and an ownership culture built on trust have contributed to the success of Southwest Airlines:

At any given time, 13 to 15 percent of Southwest's stock is owned by its employees through a profit-sharing plan with the option to purchase additional stock. "Employees feel like owners because they are owners," says Colleen. "Ownership is one of the things our employees are most proud of. How can you expect people to have passion and excitement for what they do if they're not owners? We've had flight attendants and mechanics leave Southwest as millionaires."

"Everything is negotiated," says Colleen. "We give employees the opportunity to criticize and question us. Southwest doesn't often need to conduct surveys or hire consultants to determine what we are doing wrong or well. The employees tell us face-to-face year-round. We have open books, we're transparent and we're all-inclusive in telling employees what's happening.

It also discusses how they hire people for their individuality, sense of humor, and potential team mentality:

"Another thing that's unique about Southwest is its sense of humor," says Colleen. "We use words that corporate America doesn't. Our stock exchange symbol is LUV. We give employees a lot of freedom. We don't want them to be cookie-cutter copies of each other. When most people go to work, they take off their personal demeanor. Then they go home and act like themselves again. We hire people for their individuality, and we want to share that with the passengers. We test for a sense of humor. We want them to laugh. We watch their interactions with others outside of the formal interview. You can train anyone to move a bag from one place to another. A team mentality is what we're looking for."

Proposed Regulations Allow Suspension or Reduction of Safe Harbor Nonelective Contributions Mid-Year

IRS Proposes Rules Allowing Employers to Suspend or Reduce Safe Harbor Nonelective Contributions discusses the release of proposed Treasury Regulation [REG–115699–09] – Suspension or Reduction of Safe Harbor Nonelective Contributions effective for amendments adopted after May 18, 2009. The proposed regulations would permit an employer that incurs a substantial business hardship to reduce or suspend safe harbor nonelective contributions during a plan year, providing an alternative to terminating the safe harbor plan:

The proposed regulations would amend Sec. Sec. 1.401(k)-3 and 1.401(m)-3 to permit an employer sponsoring a safe harbor plan described in section 401(k)(12) or 401(k)(13) that incurs a substantial business hardship (comparable to a substantial business hardship described in section 412(c)) to reduce or suspend safe harbor nonelective contributions during a plan year. These proposed regulations would provide an employer an alternative to the option of terminating the employer's safe harbor plan in such a situation.

The proposed regulations would allow for the reduction or suspension of safe harbor nonelective contributions under rules generally comparable to the provisions relating to the reduction or suspension of safe harbor matching contributions. Under these rules, a plan that reduces or suspends safe harbor nonelective contributions will not fail to satisfy section 401(k)(3), provided that:

(1) All eligible employees are provided a supplemental notice of the reduction or suspension;

(2) the reduction or suspension of safe harbor nonelective contributions is effective no earlier than the later of 30 days after eligible employees are provided the supplemental notice and the date the amendment is adopted;

(3) eligible employees are given a reasonable opportunity (including a reasonable period after receipt of the supplemental notice) prior to the reduction or suspension of the safe harbor nonelective contributions to change their cash or deferred elections and, if applicable, their employee contribution elections;

(4) the plan is amended to provide that the ADP test will be satisfied for the entire plan year in which the reduction or suspension occurs, using the current year testing method; and

(5) the plan satisfies the safe harbor nonelective contribution requirement with respect to safe harbor compensation paid through the effective date of the amendment.

The proposed regulations would also provide that the supplemental notice requirement is satisfied if each eligible employee is given a notice that explains:

(1) The consequences of the amendment reducing or suspending future safe harbor nonelective contributions;

(2) the procedures for changing cash or deferred elections and, if applicable, employee contribution elections; and

(3) the effective date of the amendment.

The proposed regulations would further provide that these same rules that apply to safe harbor plans under Sec. 1.401(k)-3 also apply to safe harbor plans under Sec. 1.401(m)-3, except that the plan must be amended to provide that the ACP test will be satisfied for the entire plan year in which the reduction or suspension occurs using the current year testing method.

Because the reduction or suspension of safe harbor contributions can be effective no earlier than the later of 30 days after the notice is provided to all eligible employees and the date the amendment is adopted, an employer that wants to reduce or suspend safe harbor contributions during a year could not implement this change by adopting the amendment at the end of the plan year. In addition, a plan that is amended during the plan year to reduce or suspend safe harbor contributions (whether nonelective contributions or matching contributions) must prorate the otherwise applicable compensation limit under section 401(a)(17) in accordance with the requirements of Sec. 1.401(a)(17)-1(b)(3)(iii)(A). Furthermore, a plan that is amended to reduce or suspend safe harbor contributions is no longer a plan described in section 401(k)(12), 401(k)(13), 401(m)(11), or 401(m)(12) for the entire plan year. Accordingly, such a plan is not described in section 416(g)(4)(H) and, thus, will be subject to the top-heavy rules under section 416.

The regulations refer to IRC Section 412(c) for the definition of a substantial business hardship, which refers to IRC Section 412(d)(2) - Minimum funding standards - Variance from minimum funding standard - Determination of business hardship:

(2) Determination of business hardship

For purposes of this section, the factors taken into account in determining temporary substantial business hardship (substantial business hardship in the case of a multiemployer plan) shall include (but shall not be limited to) whether or not—

(A) the employer is operating at an economic loss,

(B) there is substantial unemployment or underemployment in the trade or business and in the industry concerned,

(C) the sales and profits of the industry concerned are depressed or declining, and

(D) it is reasonable to expect that the plan will be continued only if the waiver is granted.

Survey: ESOP Companies Experienced Five-Year Stock Growth

The May 15, 2009 Employee Ownership Update is online and discusses the following:

• ESOP Companies Show Strong Five-Year Stock Growth
  
• What Stories Do Your Customers Tell About You?
  
• Backdate Update: Yes, Backdating Really Did Cause Significant Shareholder Damage
  
• Ownership Thinking Meeting

The Update discusses a recent NCEO survey that reported that approximately 88% of surveyed ESOP companies experienced stock growth from 2003 to 2008, with 54% experiencing at least 10% growth, and 23% experiencing 20% or more growth. The discussion of Quantifying Your Ownership Culture continued with Southwest and Publix Supermarkets examples.

It also discusses the impact the backdating scandal had on share prices and judgments:

Looking at the days around the announcement of the backdating problem at a company, stock prices dropped seven percent below the market-adjusted expected price, and stayed that way for several weeks afterwards. Looking over a one-year period after the Wall Street Journal story opened the backdating controversy, normalized returns for a portfolio of scandal-tainted companies dropped between 15% and 20%, depending on what comparison benchmarks are used... Judgments in the settled cases, for instance, have averaged 1.5% of pre-scandal market capitalization in class action suits and .23% in shareholder derivative suits (a very difficult kind of suit to win).

Reasons to Establish an ESOP

Top 10 Reasons to Consider Employee Ownership shares ten reasons every business should consider establishing an ESOP:

1. It improves the bottom line.
2. It makes managing the business easier and more fun.
3. It supplies the glue with which to build a business-oriented culture.
4. It makes work more meaningful.
5. It serves as a currency for attracting talent.
6. It facilitates ownership succession in closely held businesses.
7. It enables business owners to access the value of their equity without paying capital gains taxes.
8. It affords access to a unique form of highly subsidized finance.
9. It creates wealth in places it would not otherwise exist.
10. From a national policy perspective, it fosters a more equitable and effective brand of capitalism.

ESOP Distribution Issues to Avoid with Plan Documents, Distribution Policies, and Distribution Paperwork

Problems To Avoid In ESOP Distributions reinforces the importance of Distribution Planning by discussing the potential fiduciary, repurchase liability, and participant claim issues that plan sponsors and fiduciaries face when designing their ESOP Distribution Policy. It focuses on three main issues:

• Designing and drafting distribution provisions – Make sure your Plan Document contemplates the IRC Section 409(o) ESOP distribution rules. Look for Conflicts Between the Plan Document and the Summary Plan Description (SPD). Be aware of the exceptions to the statutory right to demand employer securities (put option) as provided by IRC Section 409(h), including the use of the corporate articles or bylaws to restrict participants from taking a share distribution, and the importance that the provisions are drafted correctly:
  

  The Code permits an articles or bylaw restriction so that only employees of a corporation or an employee ownership trust may own shares of a company. However, we often see companies with non-employee shareholders rely on such a provision. We also find that these provisions are often in place or not properly drafted in the corporation's documents, even though the administrator or document drafters incorrectly believe that they are. Note also that corporate articles calling for "statutory close corporation" status are both insufficient for this purpose and create a whole host of corporate governance problems when there is an ESOP shareholder.

• Amendments and using distribution policies – Many ESOP advisors advocate using a separate written distribution policy to define the specifics of the distribution policy. This article discusses their concerns with using a separate written distribution policy, noting that amending the distribution policy is a change in plan terms, which can only be authorized by the plan sponsor (and approved by the board of directors). It also stresses the importance of keeping distribution changes the responsibility of the employer and not the fiduciaries.
  
• Distribution forms and administration –The article discusses the legal and communication issues with using a boilerplate distribution form and the importance of having your forms, disclosures (e.g. 402(f) Safe Harbor Notice), and cover letter(s) reviewed by your ESOP consultant and/or counsel.

This is a great topic to discuss with your ESOP advisors during the ESOP Planning process.

Proposal: Required Automatic Enrollment in IRAs

Today the U.S. Department of the Treasury announced the release of the General Explanations of the Administration's Fiscal Year 2010 Revenue Proposals. There is no mention of ESOPs in the document. However, it does propose that, effective January 1, 2012, "Employers in business for at least two years that have 10 or more employees would be required to offer an automatic IRA option to employees on a payroll-deduction basis, under which regular payroll-deduction contributions would be made to an IRA." Eligible employers would be to claim a temporary tax credit for up to $250/year for two years. Here is the complete text:

Automatic Enrollment in IRAs

Current Law

A number of tax-preferred, employer-sponsored retirement savings programs exist under current law. These include section 401(k) cash or deferred arrangements, section 403(b) programs for public schools and charitable organizations, section 457 plans for governments and nonprofit organizations, and simplified employee pensions and SIMPLE IRAs for small employers. Individuals who do not have access to an employer-sponsored retirement saving arrangement may be eligible to make smaller tax-favored contributions to individual retirement accounts or individual retirement annuities (IRAs).

IRA contributions are limited to $5,000 a year (plus $1,000 for those age 50 or older). Section 401(k) plans permit contributions (employee plus employer contributions) of up to $49,000 a year (of which $16,500 can be pre-tax employee contributions) plus $5,500 of additional pre-tax employee contributions for those age 50 or older.

Reasons for Change

For many years, until the current recession, the personal saving rate in the United States has been exceedingly low. In addition, tens of millions of U.S. households have not placed themselves on a path to become financially prepared for retirement, and the proportion of U.S. workers participating in employer-sponsored plans has remained stagnant for decades at no more than about half the total work force notwithstanding repeated private-sector and congressional attempts to expand coverage. Participation in employer-sponsored retirement saving plans such as 401(k) plans typically has ranged from two thirds to three quarters of eligible employees, but making saving easier by making it automatic has been shown to be remarkably effective at boosting participation. Automatic enrollment in 401(k) plans (enrolling employees by default unless they opt out) has tended to increase participation to more than 9 out of 10 eligible employees. In contrast, for workers who lack access to a retirement plan at their workplace and are eligible to engage in tax-favored retirement saving by taking the initiative and making the decisions required to establish and contribute to an IRA, the IRA participation rate tends to be less than 1 out of 10.

Numerous employers, especially those with smaller or lower-wage work forces, have been reluctant to adopt a retirement plan for their employees, in part out of concern about their ability to afford the cost of making employer contributions or the per-capita cost of complying with tax-qualification or ERISA (Employee Retirement Income Security Act) requirements. These employers could help their employees save -- without employer contributions or plan qualification or ERISA compliance -- simply by making their payroll systems available as a conduit for regularly transmitting employee contributions to an employee's IRA. Such "payroll deduction IRAs" could build on the success of workplace-based payroll-deduction saving by using the excess capacity to promote saving that is inherent in employer payroll systems, especially those that use automatic enrollment. However, despite efforts a decade ago by Treasury, the IRS, and the Department of Labor to approve and promote the option of payroll deduction IRAs, few employers have adopted them or even are aware that this option exists.

Accordingly, requiring employers that do not sponsor any retirement plan (and that are above a certain size) to make their payroll system available to employees and automatically enroll them in IRAs could achieve a major breakthrough in retirement saving coverage. Many employers may then be more willing to take the next step and adopt an employer plan (permitting much greater tax-favored employee contributions than an IRA plus the option of employer contributions). In addition, the process of saving and choosing investments could be simplified for employees, and costs minimized, through a standard default investment as well as electronic information and fund transfers. Workplace retirement savings arrangements made accessible to most workers also could be used as a platform to provide and promote retirement distributions annuitized over the worker's lifetime.

Proposal

Employers in business for at least two years that have 10 or more employees would be required to offer an automatic IRA option to employees on a payroll-deduction basis, under which regular payroll-deduction contributions would be made to an IRA. If the employer sponsored a qualified retirement plan or SIMPLE for its employees, it would not be required to provide an automatic IRA option for any employee. Thus, for example, a qualified plan sponsor would not have to offer automatic IRAs to employees it excludes from qualified plan eligibility because they are collectively bargained, under age 18, nonresident aliens, or have not completed the plan's eligibility waiting period. However, if the qualified plan excluded from eligibility a portion of the employer's work force or a class of employees such as all employees of a subsidiary or division, the employer would be required to offer the automatic IRA option to those excluded employees.

The employer offering automatic IRAs would give employees a standard notice and election form informing them of the automatic IRA option and allowing them to elect to participate or opt out. Any employee who did not provide a written participation election would be enrolled at a default rate of three percent of the employee's compensation. Employees could opt for a lower or higher contribution rate up to the IRA dollar limits. For most employees, the payroll deductions would be made by direct deposit similar to the direct deposit of employees' paychecks to their accounts at financial institutions.

Payroll-deduction contributions from all participating employees could be transferred, at the employer's option, to a single private-sector IRA trustee or custodian designated by the employer. Alternatively, the employer, if it preferred, could allow each participating employee to designate the IRA provider for that employee's contributions or could designate that all contributions would be forwarded to a savings vehicle specified by statute or regulation.

Employers making payroll deduction IRAs available would not have to choose or arrange default investments. Instead, a low-cost, standard type of default investment and a handful of standard, low-cost investment alternatives would be prescribed by statute or regulation. In addition, this approach would involve no employer contributions, no employer compliance with qualified plan requirements, and no employer liability or responsibility for determining employee eligibility to make tax-favored IRA contributions or for opening IRAs for employees. A national web site would provide information and basic educational material regarding saving and investing for retirement, including IRA eligibility, but, as under current law, individuals (not employers) would bear ultimate responsibility for determining their IRA eligibility.

Employers could claim a temporary tax credit for making automatic payroll-deposit IRAs available to employees. The amount of the credit would be $25 per enrolled employee up to $250 each year for two years. The credit would be available both to employers required to offer automatic IRAs and employers not required to do so (for example, because they have fewer than ten employees).

Contributions by employees to automatic IRAs would qualify for the saver's credit (to the extent the contributor and the contributions otherwise qualified), and the proposed expanded saver's credit would be deposited to the IRA to which the eligible individual contributed.

The proposal would become effective January 1, 2012.

2009 ESOP Association Award Winners

We recently shared the 2009 AACE Award Winners and 2009 Silver ESOP Award Winners. The ESOP Association announced this year's ESOP Association Award Winners at the 32nd Annual Conference:

The ESOP Association works to promote the best and brightest throughout the ESOP community. Each year the Association names an ESOP Company of the Year and an Employee Owners of the Year as well as presents awards to Chapters that have done extraordinary work throughout the year. Below are the 2008 ESOP Award Winners.

AACE Award Winners
The ESOP Association Honors Members for Excellence in Employee Ownership Communications

Employee Owner of the Year
Patrick Petro of the Worm's Way, Inc. Named 2009 Employee Owner of the Year

ESOP Company of the Year
KAPCO/VALTEC Named 2009 ESOP Company of the Year by The ESOP Association

ESOP Chapter of the Year
California/Western States Chapter Named Chapter of the Year by The ESOP Association

Chapter Officer of the Year
Tony Lessmeister of Forsythe Technology, Inc. Named Chapter Officer of the Year by The ESOP Association

Employee Ownership Month Poster Contest Winner
Herff Jones Named 2009 Employee Ownership Month Poster Contest Winner

Membership Recruitment
Sandra Paavola of Enterprise Services, Inc. Received Membership Recruitment Award from The ESOP Association

Outstanding Board of Governors Member
Michael O. Festge of Amerequip Named 2009 Outstanding Board of Governors Member by The ESOP Association

Outstanding Chapter Membership Development
California/Western States Chapter Recognized for Outstanding Membership Development by The ESOP Association

Outstanding Chapter Membership Recruitment
Ohio/Kentucky Chapter of The ESOP Association Recognized for Outstanding Membership Recruitment for the Second Year

Here are links to the 2007 and 2008 ESOP Association Award Winners.

Employee Ownership at Chrysler and GM and a Different Way to Quantify Your Ownership Culture

The April 30, 2009 Employee Ownership Update is online and discusses the following:

• Employee "Ownership" at Chrysler and GM?
  
• What Stories Do People Tell About Your Company?
  
• ESPPs in a Down Market Pose Special Challenges
  
• Carey Center Essay Contest
  

The Update discusses The Chrysler and GM Proposed Restructuring:

Under the terms of the government's bailout of the two troubled automakers, union workers at Chrysler will gain 55% ownership in return for reducing by half the automaker's $10.6 billion obligation to the United Auto Workers' retiree health-care fund. Similarly, UAW members will own 39% of General Motors through a deal that allows GM to use stock instead of cash to fund half of its $20.4 billion obligation to the UAW's retiree health-care fund.

It contains a link to Autoworkers at the Top of Automakers: What's Next?, an article that discusses how a shift in management style and culture will be needed and compares the situation to the United ESOP and the 1979 Chrysler bailout:

What happened at United over the following decade could provide valuable lessons to the workers at Chrysler and GM. The biggest key? Whether management at the automakers motivates workers to buy in to the turnaround and gets them to act as owners. "If the [companies] see this as just financing engineering and don't adapt their management style, then [unions] are just going to behave the way they always did," says Charles O'Reilly, the Frank E. Buck Professor of Management at Stanford University…

These experts do say that GM and Chrysler can learn from the United debacle—namely, that labor-as-owner arrangements work only when the management team truly brings workers into decisions and can communicate well about the ongoing trade-offs and sacrifices that owners sometime have to make. "Managers must have an 'open book' policy with high employee involvement," Rosen says. "For most companies, this is a huge shift in culture."

Experts concede that ESOPs work best when a company is thriving; the risks are much larger at companies that are struggling. That's because recriminations between management and workers rise if the turnaround doesn't take hold. "When business is bad and the outlook for the company isn't great, an 'I-told-you-so' attitude starts to form among workers," notes Michael Keeling, president of the ESOP Assn., a Washington-based trade group whose membership consists of companies that have done ESOPs.

Then again, it worked once before in Detroit: As part of the government's 1979 bailout of Chrysler, workers traded concessions for a 15% stake in the company, which paid off handsomely when a turnaround bloomed. But now it's up to the next generation of workers and managers to demonstrate that they can learn from history.

The Update also discusses a different way to quantify your ownership culture:

At the NCEO's recent annual conference, Southwest Airlines President Emeritus Colleen Barrett said that people are always lining up to her to tell her their favorite Southwest stories, usually about how employees went out of their way to help customers, make people laugh, or otherwise go well beyond what people expect from airlines. One of the attendees got up and told his own story about how a colleague who was lip-synching to the safety message at the start of the flight was asked to do it out loud on the P.A. system (he did it flawlessly) and then later given an apron and told to help pass out nuts. Barrett said that most airline employees would not be thrilled with the idea of people coming to tell their stories as they usually would be of some dreadful experience.

It also discusses the issues facing employee stock purchase plans (ESPPs) during the recent downturn due to the significant decrease in value of the stock, the annual ESPP limits, and the possibility that plans will become oversubscribed.

VEBA Ownership vs. Employee Ownership: The Chrysler and GM Proposed Restructuring

Last week it was announced that the United Auto Workers union (UAW) would eventually Get a 55% Stake in Chrysler for Concessions in a restructured Chrysler LLC:

The United Auto Workers union would eventually own 55% of the stock in a restructured Chrysler LLC under the deal reached by the union and the auto maker, according to a summary of the agreement that was reviewed by the Wall Street Journal.

Fiat SpA "eventually" will own 35%, and the U.S. government and Chrysler's secured lenders together will end up owning 10% of the company once it is reorganized, that summary said.

The summary was distributed Monday evening at a gathering of union leaders in Sterling Heights, Mich. The deal was first disclosed Sunday night. The UAW aims for Chrysler workers to vote Wednesday on the proposed agreement, which requires changes to the union's current Chrysler contract.

According to the summary, Chrysler will also issue a $4.59 billion note to the health-care trust fund that the union will manage for retired workers. The agreement said Chrysler will pay $300 million in cash into the trust fund in 2010 and 2011, and increasing amounts up to $823 million in the years 2019 to 2023.

The trust fund will own a "significant" amount of Chrysler stock and will be allowed to appoint a representative to Chrysler's board, the summary said.

Chrysler and Employee Ownership? notes that this is both good news and bad news for ESOPs and the employee ownership community:

Good news in that it shows a psychological and philosophical acceptance of employee ownership in some form as the desired outcome under certain circumstances.

Bad news in that it is not an ESOP. And, like many of the ownership schemes established in very distressed companies, the outlook is problematic for those companies.

ESOP advocates should not break out the champagne, just yet.

A voluntary employees' beneficiary association (VEBA), and not the employees, will hold the shares:

A voluntary employees' beneficiary association (VEBA) under Internal Revenue Code section 501(c)(9) is an organization organized to pay life, sick, accident, and similar benefits to members or their dependents, or designated beneficiaries if no part of the net earnings of the association inures to the benefit of any private shareholder or individual.

The organization must meet the following requirements:

1. It must be a voluntary association of employees;

2. It must provide for payment of life, sick, accident, or other benefits to members or their dependents or designated beneficiaries and substantially all of its operations are for this purpose; and

3. Its earnings may not inure to the benefit of any private individual or shareholder other than through the payment of benefits described in (2) above.

Membership of a section 501(c)(9) organization must consist of individuals who are employees who have an employment-related common bond. This common bond may be a common employer (or affiliated employers), coverage under one or more collective bargaining agreements, membership in a labor union, or membership in one or more locals of a national or international labor union. An organization that is part of a plan will not be exempt unless the plan meets certain nondiscrimination requirements. However, if the organization is part of a plan maintained under a collective bargaining agreement between employee representatives and employers, and such plan was the subject of good faith bargaining between such employee representatives and employers, the plan need not meet such nondiscrimination requirements for the organization to qualify as tax exempt

The U.S. Treasury, and not the VEBA, will get any profits from the sale of any shares.

UAW Says Won't Control Chrysler discusses how the union will not have control and could still act independently:

The United Auto Workers president is seeking to distance his union from direct responsibility for the future of Chrysler LLC, noting 55% of the auto maker will be owned by a retiree health care trust fund and not the union itself.

"It's this independent trust that will own these shares," UAW President Ron Gettelfinger said on the Fox Business Network Friday morning. Mr. Gettelfinger's office did not immediately respond to interview requests.

The trust--known as a Voluntary Employee Beneficiary Association, or VEBA--is supposed to take ownership of 55% of Chrysler as part of a government-brokered cost-cutting plan that union workers ratified earlier this week. Chrysler filed for federal bankruptcy protection Thursday.

Mr. Gettelfinger also implied in the Fox interview that the UAW would be able to act independently, even strike if necessary, despite the fact that the union would own a critical piece of the company through the VEBA trust.

"The VEBA is controlled by the outside independent directors who have been appointed by a judge to serve on that," he said. "We have less UAW representation on the VEBA. And as far as the board seat that the VEBA is going to get [on the Chrysler board] with the approval of the UAW, the voting will be done by independent directors….So, I don't see that conflict of interest issue."

At Chrysler and GM, It's Not Employee Ownership discusses the differences between this VEBA arrangement and a traditional employee stock ownership plan (ESOP):

So how does this compare to conventional employee ownership through an employee stock ownership plan (ESOP), broadly distributed stock options, or similar arrangements? Unlike participants in such plans, employees involved in one of these VEBA arrangements do not see personal gains or losses from the share price other than to the extent that if the shares do go down enough, the VEBA may not have sufficient funds for retiree health care programs. Many, and perhaps most, current employees may never benefit from these programs, which very well could be reduced or eliminated in the future if the companies do not recover quickly. If the stock does perform at all well, it will be sold as soon as it meets the VEBA obligation, providing no potential upside.

Second, in actual employee ownership plans, employees individually have ownership attributed to them; here, the ownership is held on a short-term basis by a trust associated with the UAW.

Finally, employee ownership is very rarely used in troubled companies, despite all the media attention to companies such as the Tribune Company and United Airlines. Well under one percent of all employee ownership plans are used this way. Plans are typically set up in healthy businesses as a way to provide an equity stake to employees and, in the case of ESOPs, very often to transfer ownership over time to employees in a way that does not require them to use their own money to buy shares.

Chrysler Workers Urge Obama to Support Ownership Push discusses how some current and former Chrysler workers are pushing for an employee purchase of Chrysler:

Ms. Mauder said she and others in her group oppose union ownership of the company. They see the tentative agreement with the UAW as handing the company over to UAW leadership rather than rank and file union members or non-UAW employees, she said.

"They're going to be the ones that have a vote, not the employees," said Ms. Mauder. "So it will be business as usual."

Ms. Mauder, a former UAW member from Toledo says those in favor of an employee purchase of Chrysler reorganized in recent months. The AAWOC has more than 200 active volunteers.

"We really want full ownership," she said. "We can have a new Detroit, not the same business as usual."

Ms. Mauder's effort is backed by civil rights icon Walter Fauntroy, a former congressman and advocate of employee stock ownership plans, or ESOPs.

We also discussed ESOPs and the Auto Industry Bailout earlier this year.