Socialism: weigh the pension-law cases on accounts like these, and pause untaxed credits until the Labor Department answers

Co-Authored-By: Claude Opus 5.5 <[email protected]> Claude-Session: https://claude.ai/code/session_01QWPs69B8nQZjtPEUXMKzZx
2026-09-26 13:48:50 -06:00
parent e5bc9f2ba2
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6 changed files with 26 additions and 10 deletions
@@ -36,7 +36,7 @@ Mondragon's original split was similar: 10% to education and the community, at l
 The members' share is then split again, between cash now and the account:

 - **At least 20% of it is paid in cash right away.** Members owe income tax on their whole allocation in the year it's made, including the part that goes into the account. The cash is there so they can pay that tax. This is how US co-op tax law works ([Democracy at Work Institute guide](https://institute.coop/sites/default/files/resources/Internal-Capital-Accounts.pdf)). The default is half in cash.
- **Lower-income members can take it all in cash.** For a low-wage worker, being taxed on money they can't touch can cost them tax credits and health-care subsidies. So any member whose household income is under twice the poverty line can take their whole share in cash, or the standard split, with nothing in between, so nobody chooses how much to invest. They choose before the year starts, and one low year doesn't qualify. If they take the standard split, by default they aren't taxed on the account part until it's paid out ([How a Locked Co-op Is Taxed](taxes.md#capital-accounts)).
+- **Lower-income members can take it all in cash.** For a low-wage worker, being taxed on money they can't touch can cost them tax credits and health-care subsidies. So any member whose household income is under twice the poverty line can take their whole share in cash, or the standard split, with nothing in between, so nobody chooses how much to invest. They choose before the year starts, and one low year doesn't qualify. All cash is the default. Once the Labor Department has answered on pension law, those who take the standard split won't be taxed on the account part until it's paid out ([How a Locked Co-op Is Taxed](taxes.md#capital-accounts)).
 - **The rest goes into each member's account.**

 Members can also raise their own salaries instead of taking profit, but that doesn't get around the reserve. It takes its share of pay above the going rate too (see [Investing for the Long Run](the-long-run.md#the-rules)).
@@ -68,12 +68,28 @@ Mondragon pays members their accounts when they retire or leave, and so do some

 A pension plan would break the account. Its money has to be held in a trust, apart from the business ([29 U.S.C. 1103](https://www.law.cornell.edu/uscode/text/29/1103)), and the plan can't lend to the employer ([29 U.S.C. 1106](https://www.law.cornell.edu/uscode/text/29/1106)). The whole point of the account is that the co-op uses the money.

-**A fixed schedule is designed to stay outside the law's definition, but that isn't settled.** In 1995 the Labor Department said a company's profit-based program wasn't a pension plan because it didn't "expressly provide for a deferral of income to the termination of covered employment." But that program paid nothing to people who quit, and the Department pointed to that. It also warned that a program can still become a pension plan "as a result of surrounding circumstances," such as "an inordinate percentage" of participants being near retirement age when payments arrive ([Advisory Opinion 95-23A](https://www.dol.gov/sites/dolgov/files/EBSA/about-ebsa/our-activities/resource-center/advisory-opinions/erisa-section-3-3-employee-pension-benefit-plan-advisory-opinion-1995-23a.pdf)). Here, people who leave are still paid afterward, on the same dates as everyone else. A court could count that against the design. So:
+**A fixed schedule is designed to stay outside the law's definition, but that isn't settled.** In 1995 the Labor Department said a company's profit-based program wasn't a pension plan because it didn't "expressly provide for a deferral of income to the termination of covered employment." But that program paid nothing to people who quit, and the Department pointed to that. It also warned that a program can still become a pension plan "as a result of surrounding circumstances," such as "an inordinate percentage" of participants being near retirement age when payments arrive ([Advisory Opinion 95-23A](https://www.dol.gov/sites/dolgov/files/EBSA/about-ebsa/our-activities/resource-center/advisory-opinions/erisa-section-3-3-employee-pension-benefit-plan-advisory-opinion-1995-23a.pdf)). Here, people who leave are still paid afterward, on the same dates as everyone else. A court could count that against the design.
+
+**Courts weigh the facts differently.** Two federal appeals courts have found pension plans in programs that called themselves deferred compensation, let employees choose to put off part of their pay, and paid it when they left. The Fifth Circuit did in 2014 ([*Tolbert v. RBC Capital Markets*, 758 F.3d 619](https://www.courtlistener.com/opinion/2683548/brenda-tolbert-v-rbc-capital-markets-corp/)) and the Sixth in 2019 ([*Wilson v. Safelite*, 930 F.3d 429](http://www.opn.ca6.uscourts.gov/opinions.pdf/19a0148p-06.pdf)). Both read "results in a deferral" literally. But the Fifth Circuit's own earlier rule still stands: "the mere fact that some payments under a plan may be made after an employee has retired or left the company does not result in ERISA coverage" (*Murphy v. Inexco Oil*, 1980, quoted in *Tolbert*). In April 2026 the Fourth Circuit held that awards paid eight years after they were granted were a bonus program, not a pension plan, partly because 92% of the payments went to people still working there ([*Milligan v. Merrill Lynch*](https://www.govinfo.gov/content/pkg/USCOURTS-ca4-25-01385/pdf/USCOURTS-ca4-25-01385-1.pdf)). It listed six things courts can weigh:
+
+1. whether everyone takes part, or only some
+2. whether it's paid for with money workers would otherwise get now
+3. whether money is really set aside
+4. whether workers can choose to put payment off until they leave
+5. whether it's presented as retirement savings
+6. whether the firm's results change what's paid
+
+**The model's argument, and its fallback.** First, nothing is put off until anyone leaves. Each credit is paid on a date fixed when it's made, the same for everyone, whether or not they've left. Members are taxed on it that year as if they'd received it, which counts against any "deferral of income." And it's members' capital in their own co-op, not an employer's plan for holding back pay. If a court treats the credit as pay anyway, the fallback is the Labor Department's rule: a share of profit on top of wages is a bonus for work, and it isn't systematically put off until people leave. That fallback concedes, for pension law only, that the share is a bonus. That sits uneasily with the model's position under tax and wage law that it's an owner's share, not pay ([Owners Are Still Workers](labor-law.md#is-the-profit-share-pay)).
+
+**Two things weaken it.** One is the lower-income option. Credits that aren't taxed until paid, chosen by the member in advance and run under the tax rules for deferred pay, look most like the plans in *Tolbert* and *Wilson*. The other is that nobody loses their account for leaving, so a lot of it is paid to people who've left. If a tenth of members leave each year, about 40% of each five-year credit belongs to someone who's gone by the time it's paid, and about 27% with a three-year wait. It's less by dollars, since people who leave tend to be newer, with smaller credits. In home care, where even co-ops lose about 38% a year ([When People Don't Stay Long](high-turnover.md)), it's most of it. So:

 - **Nothing about the payout depends on leaving:** not the date, not the amount, not the small-balance rule.
 - **The wait is short and the same for everyone,** at most seven years, not tied to age or retirement.
- **The account isn't sold as retirement savings.** A co-op that wants to help members save for retirement does it the ordinary way, with a regular retirement plan held outside the business.
- **The first pilot co-ops ask the Labor Department for an advisory opinion on their real bylaws, and the bank pays.** An opinion only covers the co-op that asked, on its own facts, so the bank also asks the Department for a rule any employer could use, for profit-sharing paid on a short fixed schedule. It doesn't ask Congress for an exemption only co-ops would get.
+- **Credits taxed later wait for the Labor Department.** Until the Department answers, co-ops don't offer them. Lower-income members choose between all cash, the default, and the standard split, taxed now ([How a Locked Co-op Is Taxed](taxes.md#credits-taxed-later-the-deferred-pay-rules)).
+- **Most of what's paid goes to people still working there.** The federation's software reports each year what share of a co-op's account payouts, in dollars, went to people who weren't working there, counting small balances and payments to heirs. It also reports the share paid to people at or near retirement age. If more than a third went to people who weren't working there, averaged over three years, the co-op shortens the wait for new credits to three years. If it's still over a third after that, it stops making new credits, and the members' share is paid in cash. A third is the model's own number, far looser than the 8% in *Milligan*, so the request to the Department asks where the line is. Stopping new credits doesn't change the status of old ones, which are still paid on schedule.
+- **The account isn't written or sold as deferred pay or retirement savings.** The bylaws describe it as members' capital under state co-op law. A co-op that wants to help members save for retirement does it the ordinary way, with a regular retirement plan held outside the business. Where accounts stop, the co-op signs members up for the federation's pooled retirement plan by default, paid from their own cash share if they don't opt out.
+- **The same rules apply everywhere.** Under ERISA a suit can be brought where the plan is run, where the breach took place, or wherever a defendant can be found ([29 U.S.C. 1132(e)(2)](https://www.law.cornell.edu/uscode/text/29/1132)). A former member who moves can take the case with them, so a rule based on where the co-op sits wouldn't protect it.
+- **The first pilot co-ops ask the Labor Department for an advisory opinion on their real bylaws, and the bank pays.** An opinion only covers the co-op that asked, on its own facts, so the bank also asks the Department for a rule any employer could use, for profit-sharing paid on a short fixed schedule. The Fourth Circuit held that the Department acted within its power to define the law's terms when it wrote its bonus rule ([29 U.S.C. 1135](https://www.law.cornell.edu/uscode/text/29/1135)). Other circuits don't have to agree. It doesn't ask Congress for an exemption only co-ops would get.

 **The cost is capital.** Money paid back after five years is money the co-op can't keep using for fifteen. So a co-op that wants to invest more has to keep more in its permanent reserve, and that weakens the model's answer to the horizon problem ([Investing for the Long Run](the-long-run.md#who-pays-for-an-investment-and-when)).

@@ -89,7 +89,7 @@ Some things make it less harsh than it sounds:

 - **The vote doesn't ramp.** A member who stays one year has the same vote as one who stays thirty.
 - **Time on the ramp adds up.** Someone who leaves and comes back within a few years picks up where they left off, and protected leave, like parental or medical leave, counts as time worked ([Worker Ownership](worker-ownership.md)). That matters in care work, where many workers, most of them women, step out for a while to care for their own families.
- **Whatever they built goes with them.** A member's account keeps paying out on its normal schedule after they leave, and small balances are paid all at once ([Member Capital Accounts](capital-accounts.md#how-its-paid-out)).
+- **Whatever they built goes with them.** A member's account keeps paying out on its normal schedule after they leave, and small balances are paid all at once ([Member Capital Accounts](capital-accounts.md#how-its-paid-out)). But where most payouts would go to people who've left, pension law makes accounts risky, so co-ops with turnover this high almost always pay the members' share all in cash instead, and sign members up for a retirement plan outside the business ([Member Capital Accounts](capital-accounts.md#why-not-pay-it-out-when-you-leave)).
 - **In care work, the profit is small anyway.** At home care's thin margins, a full share is worth a couple of thousand dollars a year, and a typical member's is less ([Member Capital Accounts](capital-accounts.md)). For these workers, most of what matters is pay, hours and a say in how the work is done.

 A co-op can choose the short end of the ramp. This page doesn't shorten it further, because the founding plan sets that range on purpose. A longer ramp was meant to let a co-op hire without every new member cutting into everyone else's share right away. Under tax law, it only does that if the co-op pays the difference as wages for years of service ([How a Locked Co-op Is Taxed](taxes.md#the-tenure-ramp)). Whether low-margin, high-turnover co-ops should be allowed a much shorter ramp is an open question ([Open Problems](open-problems.md)).
@@ -13,7 +13,7 @@ summary: A working model for building an economy where the people who do the wor

 This model doesn't buy, seize or convert anyone's company. Instead it builds new worker-owned companies alongside existing ones, then lets customers and workers choose between them.

- **Workers own their company.** Every member gets one vote. A share of the profits grows with tenure until long-time members split them equally, per hour worked, which is how federal tax law lets co-ops pay tax on it only once. Salaries still exist, and hard jobs still pay more. Part of each year's profit goes into a personal account that pays it back a few years later on a fixed schedule, whether or not you've left, which is designed to keep it outside federal pension law, and part goes into a permanent reserve that keeps the business investing. Members can't drain it through high pay or let the equipment quietly wear out, and big bets get an outside opinion first. An insurance pool the co-ops pay for protects workers' last paychecks and part of their savings if the co-op fails. A fair, fast process deals with members who won't do the work, with protections so it can't be turned on the wrong people. When business falls off, everyone shares the cut before anyone is laid off, and layoffs follow an order set in advance that treats members and non-members alike. Members are the co-op's employees, so they get the minimum wage, overtime and injury insurance like anyone else. Where the law leaves owners out, of unemployment insurance in some states or of union protection, the co-op's charter fills what it can. Membership comes automatically after a short probation, so co-ops in high-turnover work like home care don't end up run by the few who stay. Where Medicaid requires 80% of home care payments to go to care workers, co-ops meet it from wages alone. Equal shares give members a reason to turn down growth into lower-paying work, so co-ops can grow by starting new co-ops they invest in instead. The checks behind all this are scaled to size, so small co-ops get a yearly review and random audits instead of a full audit every year, though honest checking still costs them real money. [Worker Ownership](worker-ownership.md), [Does Sharing the Profit Mean Less Effort?](free-riding.md), [When Work Runs Short](downturns.md), [When People Don't Stay Long](high-turnover.md), [Owners Are Still Workers](labor-law.md), [When Growing Means Sharing](growth.md), [Member Capital Accounts](capital-accounts.md), [How a Locked Co-op Is Taxed](taxes.md), [Protecting Members' Savings](savings-guarantee.md), [Investing for the Long Run](the-long-run.md) and [What the Rules Cost a Small Co-op](compliance.md)
+- **Workers own their company.** Every member gets one vote. A share of the profits grows with tenure until long-time members split them equally, per hour worked, which is how federal tax law lets co-ops pay tax on it only once. Salaries still exist, and hard jobs still pay more. Part of each year's profit goes into a personal account that pays it back a few years later on a fixed schedule, whether or not you've left, which is designed to keep it outside federal pension law, though courts haven't settled that; where most payouts would go to people who've left, as in high-turnover work, the share is paid in cash instead. Part goes into a permanent reserve that keeps the business investing. Members can't drain it through high pay or let the equipment quietly wear out, and big bets get an outside opinion first. An insurance pool the co-ops pay for protects workers' last paychecks and part of their savings if the co-op fails. A fair, fast process deals with members who won't do the work, with protections so it can't be turned on the wrong people. When business falls off, everyone shares the cut before anyone is laid off, and layoffs follow an order set in advance that treats members and non-members alike. Members are the co-op's employees, so they get the minimum wage, overtime and injury insurance like anyone else. Where the law leaves owners out, of unemployment insurance in some states or of union protection, the co-op's charter fills what it can. Membership comes automatically after a short probation, so co-ops in high-turnover work like home care don't end up run by the few who stay. Where Medicaid requires 80% of home care payments to go to care workers, co-ops meet it from wages alone. Equal shares give members a reason to turn down growth into lower-paying work, so co-ops can grow by starting new co-ops they invest in instead. The checks behind all this are scaled to size, so small co-ops get a yearly review and random audits instead of a full audit every year, though honest checking still costs them real money. [Worker Ownership](worker-ownership.md), [Does Sharing the Profit Mean Less Effort?](free-riding.md), [When Work Runs Short](downturns.md), [When People Don't Stay Long](high-turnover.md), [Owners Are Still Workers](labor-law.md), [When Growing Means Sharing](growth.md), [Member Capital Accounts](capital-accounts.md), [How a Locked Co-op Is Taxed](taxes.md), [Protecting Members' Savings](savings-guarantee.md), [Investing for the Long Run](the-long-run.md) and [What the Rules Cost a Small Co-op](compliance.md)
 - **A small public bank lends to worker co-ops.** It charges market rates, so it only succeeds if co-ops can really compete. Its whole job is to be willing to lend to a kind of company other banks won't. Spain, Italy and the US have all tried versions of this, and the pilot is built around what went right and wrong. [The Bank](the-bank.md) and [Has This Been Tried?](precedents.md)
 - **Owners who want to sell to their workers can.** The bank lends for these sales on a separate track, with its own $100 million and its own test. Only healthy firms qualify, there's no new tax break, the price is capped at an independent appraisal, the seller shares the risk, and the whole workforce votes. It serves deals the SBA's rules shut out, which ask a co-op, unlike an ESOP, for cash up front and one worker's personal guarantee. Its results are compared with SBA-financed purchases and ESOP sales, and its pay test follows everyone who worked there at the sale. [When an Owner Wants to Sell to the Workers](buyouts.md)
 - **Co-ops funded this way stay co-ops forever.** They can't be sold to conventional owners, and members can't vote to cash out what earlier members built. An independent lock-holder can veto any attempt, including selling the business off piece by piece. If a co-op goes bankrupt, only another co-op can buy it whole, and its workers get a real chance to be that buyer. That needs an amendment to federal bankruptcy law, drafted here, and a short model state law closes the ways out that state law leaves open. [The Lock](the-lock.md), [When a Locked Co-op Goes Bankrupt](bankruptcy.md), [The Lock in State Law](lock-state-law.md)
@@ -50,7 +50,7 @@ Members get two kinds of money: wages, paid through payroll at no less than the

 - **Tax.** The model argues it's a patronage dividend, which is how co-op tax law pays owners, and that it doesn't carry payroll tax. That's unsettled ([How a Locked Co-op Is Taxed](taxes.md#payroll-tax-on-profit-shares)). For lower-income members' credits that aren't taxed until paid, the co-op also follows the tax rules for deferred pay, as a precaution, without conceding that they apply ([How a Locked Co-op Is Taxed](taxes.md#credits-taxed-later-the-deferred-pay-rules)).
 - **Overtime.** Federal overtime law counts almost everything an employer pays, so the co-op adds the share into the overtime rate, as above. Its definition is broader than the tax law's, so this doesn't settle the tax question either way.
- **Pension law.** Members' accounts are designed to stay outside it even if the share were counted as pay ([Member Capital Accounts](capital-accounts.md#why-not-pay-it-out-when-you-leave)).
+- **Pension law.** Members' accounts are designed to stay outside it. The model argues first that nothing is held back until people leave. In the alternative, if the share counts as pay, it argues that it's a bonus under the Labor Department's rule. That fallback concedes, for pension law only, the point the model resists elsewhere ([Member Capital Accounts](capital-accounts.md#why-not-pay-it-out-when-you-leave)).
 - **Medicaid's home care pay rule.** From 2030, agencies must spend 80% of certain Medicaid home care payments on care workers' pay. That rule borrows the overtime law's broad meaning of pay, so the share might count. The co-op doesn't count it anyway, to keep one position everywhere, and pays any shortfall as wages ([When People Don't Stay Long](high-turnover.md#when-medicaid-decides-how-much-goes-to-pay)).
 - **State laws on paying wages.** This is the hard one. Many states require wages to be paid on time and in full, forbid employers from taking any back, require final pay within days when someone leaves, and don't let workers sign those rights away. California's definition of wages covers "all amounts for labor performed by employees," however they're calculated ([Cal. Labor Code § 200](https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?lawCode=LAB&sectionNum=200)). It's unlawful there for an employer "to collect or receive from an employee any part of wages theretofore paid" ([§ 221](https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?lawCode=LAB&sectionNum=221)), and no private agreement can set those rules aside ([§ 219](https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?lawCode=LAB&sectionNum=219)). If a credit in a member's account counted as wages there, holding it for years, charging losses to it and pausing it in a bad year could all be illegal, for members who stay as well as those who leave.

@@ -13,7 +13,7 @@ An honest list of what the model hasn't solved yet, most dangerous first.

 2. **The horizon problem.** *(Mostly answered.)* Members near retirement have little reason to vote for investments whose payoff arrives after they leave. The evidence from France and Italy finds no underinvestment where co-ops must keep a reserve, and [Investing for the Long Run](the-long-run.md) closes the main routes around this model's reserve: pay above the going rate, sales of assets, development spending, high pay that turns into losses, and worn-out equipment still in use. A warning light shows when a co-op stops replacing its equipment, and big bets get an independent opinion before members vote. Still open: nothing forces a co-op to maintain what it has, a bad bet that fails after its backers leave falls on the people who came after, and it's unsettled whether 30% is enough and whether the account rate is right. Members' accounts now pay back within three to seven years ([Member Capital Accounts](capital-accounts.md#why-not-pay-it-out-when-you-leave)), so they help less with long-lived investments than accounts held until members leave. Letting members sell their places to incoming workers was rejected, because that is how the plywood co-ops ended up sold.

-3. **Members' savings sit inside their employer.** *(Partly answered.)* [Member capital accounts](capital-accounts.md) are capped at a year's pay, protected by a solvency test, and now insured by a pool the co-ops pay for ([Protecting Members' Savings](savings-guarantee.md)). It covers final wages, former members' payouts and a protected slice of current accounts. Premiums are now estimated from Europe's wage guarantee funds and US closure and default rates: at least 0.25% of payroll for final wages, and probably 2% to 3% a year of covered savings, which takes nearly all the interest on a protected slice. The reserve target is sized for a five-year wave of failures like 2008–2012, and cover for current members' savings waits until the pool has its own track record. Still open: the pool has no government backing, so a worse recession could outrun it; the estimates rest on rough data, not co-ops; the reserve takes about fifteen years to build; and it needs a federal charter to avoid fifty states' insurance laws. Also open: an account paid out when a member leaves would probably be a pension plan under federal law, which would forbid the co-op from using the money. So accounts now pay each year's credit back on a fixed schedule of three to seven years, whether or not the member has left. That's designed to stay outside pension law, but it isn't settled until the Labor Department answers. It gives up the trust, disclosure and fiduciary rules that pension law would bring, which the model only partly replaces, and it leaves the co-op less of its members' money to invest for the long run. State wage laws are a second risk: in some states, California likely among them, a credit in a member's account could count as wages, which can't be held back, charged with losses or paused. Co-ops in those states don't use accounts until the state changes its law ([Owners Are Still Workers](labor-law.md#is-the-profit-share-pay)), so members there build no savings in the co-op. A third: account credits look like the notes the Supreme Court has held to be securities, so the model keeps members from putting money in and asks the SEC for an answer ([Member Capital Accounts](capital-accounts.md#are-accounts-securities)). If the answer is no, the nearest exemption means calling credits pay, which works against the model's positions on tax, pension and wage law.
+3. **Members' savings sit inside their employer.** *(Partly answered.)* [Member capital accounts](capital-accounts.md) are capped at a year's pay, protected by a solvency test, and now insured by a pool the co-ops pay for ([Protecting Members' Savings](savings-guarantee.md)). It covers final wages, former members' payouts and a protected slice of current accounts. Premiums are now estimated from Europe's wage guarantee funds and US closure and default rates: at least 0.25% of payroll for final wages, and probably 2% to 3% a year of covered savings, which takes nearly all the interest on a protected slice. The reserve target is sized for a five-year wave of failures like 2008–2012, and cover for current members' savings waits until the pool has its own track record. Still open: the pool has no government backing, so a worse recession could outrun it; the estimates rest on rough data, not co-ops; the reserve takes about fifteen years to build; and it needs a federal charter to avoid fifty states' insurance laws. Also open: an account paid out when a member leaves would probably be a pension plan under federal law, which would forbid the co-op from using the money. So accounts now pay each year's credit back on a fixed schedule of three to seven years, whether or not the member has left. That's designed to stay outside pension law, but it isn't settled until the Labor Department answers, and federal appeals courts weigh programs like it differently. Because nobody loses their account for leaving, much of what's paid goes to people who've left, which weakens the case. So co-ops where more than a third of payouts go to people no longer working there shorten the wait, then stop making new credits, and credits taxed only when paid wait for the Department ([Member Capital Accounts](capital-accounts.md#why-not-pay-it-out-when-you-leave)). In high-turnover work, that almost always means no accounts, so the lowest-paid members lose the savings the model promises them. It gives up the trust, disclosure and fiduciary rules that pension law would bring, which the model only partly replaces, and it leaves the co-op less of its members' money to invest for the long run. State wage laws are a second risk: in some states, California likely among them, a credit in a member's account could count as wages, which can't be held back, charged with losses or paused. Co-ops in those states don't use accounts until the state changes its law ([Owners Are Still Workers](labor-law.md#is-the-profit-share-pay)), so members there build no savings in the co-op. A third: account credits look like the notes the Supreme Court has held to be securities, so the model keeps members from putting money in and asks the SEC for an answer ([Member Capital Accounts](capital-accounts.md#are-accounts-securities)). If the answer is no, the nearest exemption means calling credits pay, which works against the model's positions on tax, pension and wage law.

 4. **Is the lock too rigid?** A co-op that should be sold (a better operator exists, the members want out) can only go to another co-op. If the co-op sector is small, that buyer pool is tiny, and viable firms may be liquidated instead of rescued. The federation as buyer of last resort is a partial answer. Critics on the right add a sharper version: a lock that outlasts a repaid loan by generations is a permanent restriction on selling property, bought with one loan, and it binds members who never agreed to it. The lock is now built to hold in layers, including an independent lock share and rules against selling the business piece by piece ([The Lock](the-lock.md#how-the-lock-is-made-to-hold)). Its biggest legal gap is bankruptcy: federal bankruptcy law generally overrides limits on selling a bankrupt company's property, so the lock only holds in bankruptcy if Congress amends that law. [When a Locked Co-op Goes Bankrupt](bankruptcy.md) drafts that amendment. It's modeled on how bankruptcy law already treats charities. Only co-ops can buy a failed co-op whole, its workers can keep it running and bid with the wages they're owed, and creditors who never chose to lend are paid the lock's cost from the federation fund. It still needs Congress, a later Congress can repeal it, and while the co-op sector is small, some viable businesses will be broken up for lack of a co-op buyer. Italy offers a softer model: a co-op there can convert into an ordinary company, but its accumulated reserves go to the co-op development fund, not to the members ([Has This Been Tried?](precedents.md#italys-co-op-funds-coopfond-and-the-marcora-law)). That would keep the part of the lock that stops members cashing out what earlier generations built, and drop the part that stops a firm from ever changing hands.

@@ -98,12 +98,12 @@ That changes what the ramp does. The founding plan's reason for it was to stop e
 ### Capital accounts

 - **The usual way.** Members agree to be taxed now on what's credited to their accounts, and at least 20% is paid in cash. The model's default is half in cash, which covers the tax for most members.
- **Members with lower incomes can choose not to be taxed until they're paid.** The law allows a second kind of credit, a "nonqualified" notice. The co-op pays the 21% now and gets it back as a deduction when the account is paid out, and the member pays tax only when they receive the money ([§ 1382(b)(2)](https://www.law.cornell.edu/uscode/text/26/1382)). That's the default for members under twice the poverty line who take the standard split. They can take their whole share in cash instead ([Member Capital Accounts](capital-accounts.md)). These credits follow extra timing rules, [below](#credits-taxed-later-the-deferred-pay-rules).
+- **Members with lower incomes can choose not to be taxed until they're paid.** The law allows a second kind of credit, a "nonqualified" notice. The co-op pays the 21% now and gets it back as a deduction when the account is paid out, and the member pays tax only when they receive the money ([§ 1382(b)(2)](https://www.law.cornell.edu/uscode/text/26/1382)). That will be the default for members under twice the poverty line who take the standard split. It waits for the Labor Department's answer on pension law, because an untaxed credit a member chooses in advance looks most like the deferred-pay plans courts have called pension plans ([Member Capital Accounts](capital-accounts.md#why-not-pay-it-out-when-you-leave)). Until then, those members take their whole share in cash by default, or the standard split, taxed now. These credits follow extra timing rules, [below](#credits-taxed-later-the-deferred-pay-rules).
 - **Charges come out of this year's share first.** Money members already paid tax on can be moved back to the reserve, under [the pay rule](the-long-run.md#the-rules) or when losses are charged to accounts. That's probably taxable to the co-op a second time, and the member may be able to deduct only part of it. So those charges come out of the current year's profit share first, before it's credited or taxed, and reach older balances only when that isn't enough.

 ### Credits taxed later: the deferred-pay rules

-A nonqualified credit isn't taxed until it's paid, years after the work. Federal tax law has strict rules for pay that's put off like that ([26 U.S.C. § 409A](https://www.law.cornell.edu/uscode/text/26/409A)). They cover only pay for services, and the model's position is that a profit share is an owner's share, not pay ([Owners Are Still Workers](labor-law.md#is-the-profit-share-pay)). Nobody has decided whether they reach a co-op's patronage credits. So the model follows them as a precaution, and the bylaws say it does so without conceding that they apply. Breaking them would be expensive for exactly the members this option exists to help. Everything put off becomes taxable at once, with interest and an extra 20% tax (§ 409A(a)(1)(B)). So for nonqualified credits:
+A nonqualified credit isn't taxed until it's paid, years after the work. Federal tax law has strict rules for pay that's put off like that ([26 U.S.C. § 409A](https://www.law.cornell.edu/uscode/text/26/409A)). They cover only pay for services, and the model's position is that a profit share is an owner's share, not pay ([Owners Are Still Workers](labor-law.md#is-the-profit-share-pay)). Nobody has decided whether they reach a co-op's patronage credits. So the model follows them as a precaution, and the bylaws say it does so without conceding that they apply. Breaking them would be expensive for exactly the members this option exists to help. Everything put off becomes taxable at once, with interest and an extra 20% tax (§ 409A(a)(1)(B)). So once nonqualified credits are offered:

 - **Only co-ops using the federation's software offer them.** The rules below are easy to get wrong by hand. In other co-ops, lower-income members choose between all cash and the standard split, taxed now.
 - **Only lower-income members get them, by a choice made before the year starts.** A member chooses between the standard split and all cash by the end of the year before, and the choice holds for the whole year ([26 C.F.R. § 1.409A-2(a)(3)](https://www.law.cornell.edu/cfr/text/26/1.409A-2)). A new member can choose within 30 days of joining, and then it covers only profit from hours worked after the choice (§ 1.409A-2(a)(7)). The same choice fixes how the credit will be paid: at once, or in monthly payments that all fall in one calendar year. Whether a member is under twice the poverty line is judged on the higher of the last two years' household income, from their tax returns, so one low year doesn't qualify. The co-op can't decide after a year ends which credits are nonqualified.