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2022 ESOP Legislation Update: History Made in Federal Government First Set Aside Program for Wholly Owned ESOP Contractors

Posted by Marc S. Schechter | Jan 12, 2022

Contributing author: Kristine Custodio Suero, Advanced Certified Paralegal

On December 27, 2021, the National Defense Authorization Action (NDAA) for Fiscal Year 2022 was signed into law and made ESOP history. This is the first ever set aside program for federal government contractors who are 100% ESOP-owned to be eligible for noncompete follow-on contracts, subject to satisfactory performance. The pilot program is effective January 1, 2022, for a duration of five years.

Section 874 of the NDAA for Fiscal Year 2022, states: “Notwithstanding the requirements of section 2304 of title 10, United States Code, in the case of a follow-on contract for the continued development, production, or provision of products or services that are the same as or substantially similar to the products or services procured by the Department of Defense under a prior contract held by a qualified business wholly owned through an Employee Stock Ownership Plan, such products or services may be deemed to be available only from the holder of the prior contract and may be procured by the Department of Defense through procedures other than competitive procedures if the performance of the qualified business wholly owned through an Employee Stock Ownership Plan on the prior contract was rated as satisfactory (or the equivalent) or better in the applicable past performance database.”

Further, the federal House Committee on Rules posted a Joint Explanatory Statement to Accompany the NDAA for FY 2022 that included the following language: “We recognize the innovative potential in encouraging nontraditional companies, like businesses wholly owned by an ESOP, to work with the Department of Defense. While there are many companies that have a level of employee ownership, a business wholly owned by an ESOP is different. We are aware of concerns regarding correctly identifying businesses wholly owned through an ESOP, and suggest the Department review Internal Revenue Service form “Schedule K-1 (Form 1120-S)” when looking to make that determination. Additionally, while we aim to bolster the defense industrial base with the provision, we do not intend to make it possible for a business other than a small business to receive the award of a contract that would have otherwise been set aside for small businesses under the requirements of Federal Acquisition Regulation Subpart 19.502.”

If you have any questions about ESOPs, Butterfield Schechter LLP is here to help. We are San Diego County's largest law firm with a focus on employee benefits law. Contact our office today with any questions on how we can help you and your business succeed.

About the Author

Marc S. Schechter

Marc Schechter specializes in the areas of employee benefits, ERISA, and business matters.


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