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Can ESOPs Benefit Disadvantaged Communities?

Posted by Marc S. Schechter | Jan 28, 2019

Employee-ownership can benefit company owners and employees. A recent initiative is also exploring employee share ownership as an investment strategy in low-income communities. This includes discussing how employee-ownership could contribute to increased investment in designated Opportunity Zones.

The Aspen Institute Economic Opportunities Program and the Rockefeller Foundation have put out a report from a number of experts to discuss how opportunity fund investments could increase employee stock ownership program in Qualified Opportunity Zones. The report is titled: Exploring Employee Share Ownership as a Potential Investment Strategy in Opportunity Zones.

Opportunity Zones are designated economically distressed communities where some investments may be eligible for preferred tax treatment. This generally requires designation by the state and certification by the U.S. Treasury Secretary.

An ESOP is a qualified retirement plan that invests primarily in employer company stock. Eligible employees are plan participants that have an interest in company shares held in the ESOP trust until the employee retires. When the employee retires or leaves the company, the value of the employee's shares is usually paid by the trust in the form of cash.

ESOPs can provide a number of tax advantages for the business and company owners. Shareholders may also be able to defer capital gains on stock acquired by the ESOP. The businesses also tend to benefit from higher productivity, employee retention, and higher job satisfaction.

Key Insights of ESOPs in Opportunity Zones.

According to the report, there were 4 key insights about how ESOPs could be used to increase ownership interests in qualified Opportunity Zones. These include:

  1. Real estate investment businesses in these Opportunity Zones could create ESOPs as part of their employees' retirement plans, giving employees in the areas an ownership interest in those property investments.
  2. Businesses already existing in Opportunity Zones could be encouraged to create ESOPs that would benefit employees through the growth of the company that could increase capital investment in those businesses.
  3. Where business owners are looking to retire, Qualified Opportunity Zone regulations could be changed (or clarified) to allow for ESOPs to pass ownership to employees.
  4. Qualified Opportunity Zone laws should be amended to allow for a broader range of ESOP conversions to be financed within the Opportunity Zones. This would benefit the community by keeping businesses, jobs, and economic growth within the community and give local employees an ownership interest in the company.

Employee share ownership has the unique benefit of distributing the success of the company among the employees who contributed to the company's growth. While employees generally benefit from ESOPs wherever the business is located, ESOPs in economically distressed communities could benefit the workers who live in those same communities.

San Diego ESOP Law Firm

If you have any questions about ESOP opportunities and benefits, the law firm of Butterfield Schechter LLP is here to help. We are San Diego County's largest law firm focusing its law practice 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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