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Prospective 409(p) Testing

The end of the year is a good time for S Corporations to conduct prospective anti-abuse testing under IRC 409(p) for their ESOP Plan.

The anti-abuse test under IRC 409(p) is a complex ownership concentration test that must pass on every day of the plan year.   The Anti-Abuse Rule provides that Disqualified Persons cannot have ownership interests in 50% or more of S Corporation shares and/or synthetic equity.

Most calendar year plans should have participant distributions completed by this time which may affect stock ownership percentages.  The test should use current year data and project the next year’s activity.  It is critical that the administrator be provided with all the necessary data to perform this test, including any changes in family relationship and synthetic equity.

The consequences of violating the test are extreme.  If the testing has been close, discussing the calculations with your TPA and/or ESOP counsel prior to any change in ownership percentages, family relationship changes or  synthetic equity is a necessity.

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