US corp wholly owns foreign sub and maintains an ESOP (US co is an S Corp). Can the ESOP cover one nonresident alien of the foreign corp? Although an S Corp can't have a nonresident alien as a shareholder, it is the ESOP that is considered the shareholder and not the participants, correct? Also, the ESOP can be written to prevent distributions in the form of stock, so the nonresident alien will not get stock or become a shareholder. Does this work???

For a question of this complexity, shouldn't you be asking your attorney rather than the mostly anonymous thoughts of people posting here?

Under the minimum participation standards of IRC §410, both nonresident aliens and (generally) union employees are excluded from consideration. We handle several ESOP's that exclude their union employees from participation, but nevertheless selectively allow certain union employees to participate. For example, one such ESOP is sponsored by a construction contractor, and they feel that their job foremen are crucial to the success of their jobs and have accordingly allowed them to participate in the ESOP despite being covered by a collective bargaining agreement. I have other plans the name individual union employees as being specifically eligible.

I have still others that allow all union employees to participate, but carve out a very small portion of the overal employer contribution to be allocated among the BU group - thus pumping up their eligible compenation and maximum contribution per §404(a)(3) or (9), while giving very little actual benefit to the BU group.

Take a look at PLR 8144028 which seems to address your exact situation. I'll attach a copy to this post.

And yes, you are able to disallow stock distributions in order to protect your S Election.

Thank you for your thoughtfull response. My thinking exactly but it is always nice, after due dilligence, to get another opinion. By the way, the preamble to the coverage regulations comes to the same conclusion as the PLR.