4 changed files with 21 additions and 8 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. 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. 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)).
 - **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)).
@@ -52,12 +52,12 @@ Members can also raise their own salaries instead of taking profit, but that doe
 ## How it's paid out
 - **Each year's credit is paid back after five years.** The money credited to your account for 2030 is paid to you in 2035, the 2031 credit in 2036, and so on, oldest first, each after that year's accounts are closed and checked by an outside accountant ([What the Rules Cost a Small Co-op](compliance.md#what-a-review-can-and-cant-stand-in-for)). Each co-op can set the wait anywhere from three to seven years in its bylaws. It's one of the two ways US worker co-ops already pay out accounts, called a "roll-over" ([Democracy at Work Institute guide](https://institute.coop/sites/default/files/resources/Internal-Capital-Accounts.pdf)). The co-op gets to use each year's credit for years, and nobody's savings are stuck until they retire.
- **The wait is fixed when the credit is made.** A vote to change it applies only to credits made starting the year after the vote, so senior members can't speed up their own money or slow down anyone else's.
+- **The wait is fixed when the credit is made.** A vote to change it applies only to credits made starting the year after the vote, so senior members can't speed up their own money or slow down anyone else's. For credits that aren't taxed until paid, it applies only to profit from years that start after the vote ([How a Locked Co-op Is Taxed](taxes.md#credits-taxed-later-the-deferred-pay-rules)).
 - **Leaving doesn't change the schedule.** When you leave, your balance is fixed at the end of that year, after that year's profit or loss is counted, so nobody can quit just ahead of a bad year and escape it. After that it stops sharing in losses, earns the plain Treasury rate, and each year's credit is still paid on its own date.
 - **Small balances are paid early, for everyone.** Once anyone's whole balance is under $2,000, member or not, it's paid at the next payout date. That keeps a co-op from tracking small sums for years, and since it doesn't depend on leaving, nobody gains by quitting.
 - **There's no penalty for leaving.** Mondragon used to cut the payout by up to 30% for people who quit. This model doesn't, because a core promise of [the tenure cap](worker-ownership.md) is that you can change jobs without losing what you've built.
 - **Accounts are capped at one year's pay,** measured as the highest pay in the last three years, so nobody can cut their own pay to get their money sooner. Anything above that is paid out every year in cash, which a member can put in their own retirement account and invest in anything. Nobody should end up with most of their savings tied to the same company that pays their wages.
- **Any payout can be spread out.** Members get 90 days' notice of each payout and can take it at once or in up to 12 monthly payments, whichever works better with the public benefits they get ([How a Locked Co-op Is Taxed](taxes.md#benefits)).
+- **Any payout can be spread out.** Members get 90 days' notice of each payout and can take it at once or in up to 12 monthly payments, whichever works better with the public benefits they get ([How a Locked Co-op Is Taxed](taxes.md#benefits)). For credits that aren't taxed until paid, that choice is made before the year the credit is earned, and the payments all fall in one calendar year ([How a Locked Co-op Is Taxed](taxes.md#credits-taxed-later-the-deferred-pay-rules)).
 - **On death, the account goes to the person you name,** your spouse unless you name someone else with their written consent, on the normal schedule.
 - **In a divorce, a court can split the account.** The former spouse gets a separate account of their own, with no vote, paid out on the normal schedule.
 - **Every year, each person gets a statement** showing each credit, any losses charged to it, and the date it will be paid. Former members get one too. A dispute gets a written answer within 90 days and can go to an outside arbitrator from the federation's list, or to court.
@@ -108,6 +108,7 @@ A payout system can also be used to strip a failing firm. People who see trouble
 - **Every payout must pass a solvency test.** No payment may push the co-op below its loan requirements or a minimum cash level set in its bylaws when it's founded. Members can't lower that minimum without the bank's consent.
 - **If payouts fail the test, they're paused, all together, for at most two years.** Credits from the same year are treated the same whether their owner still works there or not, and the oldest are paid first when money allows. Paused amounts earn the Treasury rate plus two points, since the people waiting are carrying extra risk. While any payout is paused, **current members get no cash profit share, no bonuses and no raises above the going rate.** Nobody gets paid ahead of the people who are waiting.
 - **Credits that aren't taxed until paid follow stricter rules.** Lower-income members' nonqualified credits are paused only if an accountant finds that paying them would put the co-op at risk, not just for the loan terms or the cash minimum. They're paid as soon as it wouldn't, even ahead of the note below. That's an exception to treating the same year's credits the same, because federal rules on deferred pay require it ([How a Locked Co-op Is Taxed](taxes.md#credits-taxed-later-the-deferred-pay-rules)).
 - **After two years, a pause becomes a debt with a schedule.** Whatever is still unpaid becomes a note the co-op repays in equal parts over five years, still behind its lenders, and the [insurance pool](savings-guarantee.md) covers former members' insured amounts if the co-op fails. So the worst case for a member who leaves is a long wait: up to seven years for the last credit, plus the pause, plus the note. The co-op's bylaws have to say so in plain words.
 - **Losses are spread evenly.** When a loss is charged to members' accounts, it's charged to every year's credits that haven't been paid yet, in proportion, not to the newest or the oldest first. So the timing of payouts can't be used to dodge a loss.
 - **Payouts rank behind the co-op's lenders.** In a bankruptcy, members' accounts are paid only after the co-op's creditors. That's the honest cost of being an owner, and it's the main reason for the one-year-of-pay cap.
@@ -48,7 +48,7 @@ Time at a required meeting counts as working time under federal law ([29 CFR 785
 Members get two kinds of money: wages, paid through payroll at no less than the going rate, and a share of the profit, split by hours worked once the year's books close. The model's position is that **a member's profit share is an owner's share of profit, not pay.** It depends on the whole co-op making money, it's declared only after the year ends, and wages always come first ([How a Locked Co-op Is Taxed](taxes.md#wages-first)). But each law asks its own question, and some of the model's own rules point the other way. The share is split by hours, it grows with years of service, and workers who chose not to join get one too, in cash ([How a Locked Co-op Is Taxed](taxes.md#one-rate-per-hour-for-everyone-who-works)). For them it's simply a bonus. So the answers differ by law:
- **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)).
+- **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)).
 - **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)).
@@ -31,7 +31,7 @@ An honest list of what the model hasn't solved yet, most dangerous first.
 14. **Drift toward the safest co-ops.** *(Partly answered.)* A bank that lends only to co-ops can still lend mostly to the safe ones, like consultancies started by people with savings, as America's co-op bank did. [Who the Bank Lends To](who-gets-loans.md) sets aside $90 million of the loan money for co-ops in lower-paid work, which goes back to the general pool only if the reviewers certify the bank handled those applications fairly. Results are reported for that group and for first-time owners without much wealth, and the verdict has to say which kinds of co-ops it covers. Still open: the set-aside makes money available but can't make groups apply; it can be used mostly on work just under the average wage; first-time owners without wealth get reporting, not money; and in work whose prices are set by Medicaid or contractors, a failure may say more about the price than about co-ops.
-15. **Taxes.** *(Partly answered.)* A locked co-op is a corporation that pays tax once on members' profit shares, under the part of the tax code written for co-ops. [How a Locked Co-op Is Taxed](taxes.md) fits the model to it: profit is shared per hour worked, workers who aren't members get a share too, wages reach the going rate before any profit is shared, and charges come out of the current year's share before older, already-taxed balances. Still open: nobody has ruled that a co-op with an outside lock-holder and a reserve that goes to the federation counts as a co-op for tax purposes; whether profit shares owe payroll tax is unsettled; the ramp no longer shields senior members from new hires unless it's paid as wages; workers without work authorization can't be members; and the kept reserve pays 21% even though nobody owns it.
+15. **Taxes.** *(Partly answered.)* A locked co-op is a corporation that pays tax once on members' profit shares, under the part of the tax code written for co-ops. [How a Locked Co-op Is Taxed](taxes.md) fits the model to it: profit is shared per hour worked, workers who aren't members get a share too, wages reach the going rate before any profit is shared, and charges come out of the current year's share before older, already-taxed balances. Still open: nobody has ruled that a co-op with an outside lock-holder and a reserve that goes to the federation counts as a co-op for tax purposes; whether profit shares owe payroll tax is unsettled; the ramp no longer shields senior members from new hires unless it's paid as wages; workers without work authorization can't be members; the kept reserve pays 21% even though nobody owns it; and following the deferred-pay rules for lower-income members' untaxed credits could be read as conceding that the credits are pay.
 11. **Federal or state?** *(Mostly answered.)* The test stays federal, because one bank with one plan makes one clean experiment. Any state can copy the bank under the same published rules, reported separately, and a model state law protects the lock for co-ops that choose it ([The Lock in State Law](lock-state-law.md); [Making It Last](durability.md#federal-test-state-copies)). No state has adopted anything like it, and a co-op organized in a state that hasn't relies on its charter alone. Still open: whether a few state lenders sharing one plan would have been the stronger experiment after all, since the most durable public bank in America, North Dakota's, is a state bank.
@@ -98,8 +98,20 @@ 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 leave money in their accounts. They can still take their whole share in cash instead ([Member Capital Accounts](capital-accounts.md)).
+- **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).
- **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 to accounts that are likely to be charged later can be made as nonqualified notices.
+- **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:
 - **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.
 - **The schedule is fixed before the year starts.** A vote to change the wait applies to nonqualified credits only for profit from years that start after the vote.
 - **They're paid unless paying would put the co-op at risk.** Deferred pay can be held back past its date only if paying it would threaten the employer's ability to keep going, and then it has to be paid in the first year it wouldn't ([§ 1.409A-3(d)](https://www.law.cornell.edu/cfr/text/26/1.409A-3)). That's narrower than the co-op's ordinary solvency test, which also pauses payouts that would break its loan terms or its minimum cash level. So by December 1 each year, the co-op's outside accountant looks at the last checked accounts and a forecast, and says in writing whether paying the nonqualified credits due would have that effect. If not, they're paid by December 31. The bank's loan terms leave these payments out of its tests, so paying them doesn't put a co-op in default, and the federation pays for the finding.
 - **No five-year note.** After a two-year pause, other paused payouts become a debt repaid over five years ([Member Capital Accounts](capital-accounts.md#protecting-the-co-op-and-the-people-who-stay)). Stretching nonqualified credits out that way would count as putting them off, which the rules allow only with a year's notice and at least five more years' wait (§ 1.409A-2(b)(1)). So they stay paused and are paid in full in the first year the co-op can pay them without that risk. That means they can be paid ahead of former members waiting on the note, an exception to the rule that the same year's credits are treated the same. They belong to the lowest-paid members, and are usually small.
 - **Small balances follow a rule set in advance.** Paying a whole balance early is allowed if it's under a federal limit well above the $2,000 used here, pays out everything the co-op owes that person under every similar deferred arrangement, and the co-op's decision is in writing by the payment date (§ 1.409A-3(j)(4)(v)). So the plan counts all of a person's nonqualified credits together, and the board records the decision at each payout.
 - **If a co-op gets it wrong, it fixes it and pays the cost.** It first uses the IRS's correction program, which cuts or removes the extra tax for mistakes fixed quickly ([IRS Notice 2008-113](https://www.irs.gov/pub/irs-drop/n-08-113.pdf)). Whatever extra tax and interest remain, the co-op pays, grossed up for the tax on that payment. That payment is wages, so it goes through payroll, and it's paid by the end of the year after the member pays the tax (§ 1.409A-3(i)(1)(v)). It doesn't make up for public benefits a member loses when years of income land at once.
 ## Payroll tax on profit shares
@@ -142,7 +154,7 @@ The model doesn't shrink the benefit cliffs themselves. A low-paid member on sev
 The IRS gives binding answers on specific facts, called private letter rulings, but only to the taxpayer who asks, only about its own real transactions, and never as precedent for anyone else ([26 U.S.C. § 6110(k)(3)](https://www.law.cornell.edu/uscode/text/26/6110)). A ruling costs a fee and often takes months, and the IRS can decline to give one. So:
- **The first pilot co-ops ask, and the bank pays.** They ask whether the co-op operates on a cooperative basis with the lock and the reserve, whether the per-hour profit shares and the ramp count as patronage dividends, whether the founding share is deductible as pay, whether profit shares carry payroll tax when wages meet the going rate, and how charges moved back to the reserve are taxed.
+- **The first pilot co-ops ask, and the bank pays.** They ask whether the co-op operates on a cooperative basis with the lock and the reserve, whether the per-hour profit shares and the ramp count as patronage dividends, whether the founding share is deductible as pay, whether profit shares carry payroll tax when wages meet the going rate, how charges moved back to the reserve are taxed, and whether the deferred-pay rules, or the payroll-tax rule for deferred pay ([26 U.S.C. § 3121(v)(2)](https://www.law.cornell.edu/uscode/text/26/3121)), apply to nonqualified credits at all.
 - **Until then, every co-op uses the rules on this page, and gets a tax lawyer's opinion on its bylaws.** None of them depends on a ruling to work.
 - **Congress settles it.** The bank's own law needs Congress anyway, and so does [the bankruptcy amendment](bankruptcy.md). That law also says a locked co-op that meets these rules operates on a cooperative basis, and that its profit shares aren't wages for members paid at least the going rate. That's a statement of how existing law applies, not a lower tax rate.