Many defense contractors are turning towards employee-ownership as a way take advantage of tax savings and reward employees by giving them a stake in the company they work for. Specifically, many defense contractors are utilizing employee stock ownership Plans (ESOPs) as a way to provide owners with a succession plan that allows for flexibility and a gradual transition to employee-ownership. An
ESOP is a qualified retirement plan that gives employees an interest in employer securities. Eligible employees become plan participants and receive company stock as a benefit of working for the company. An ESOP has a number of advantages for defense contract companies, owners, and employees.
First, business owners can use an ESOP as a long-term succession plan. In contrast to selling the business to another company or individual outright, the owner can transition ownership over to the ESOP over time, while still maintaining a level of control over the business operations. This provides stability to the employees as well as to customers and vendors.
Second, defense contractors may have long-term and complex contracts and relationships with government agencies. A sudden change in leadership or sale of the company can make contractors and customers nervous and could lead to the government seeking out a competitor. With an ESOP transition, leadership and ownership changes can take place over time based on the owner's direction.
Third, some defense contractor companies looking to sell their business may not be able to find a qualified buyer who is willing to pay a fair price for the company. An ESOP provides a ready buyer to pay the fair market value for the company. When combined with the tax savings available, selling the company to an ESOP may provide a greater return than selling to another company.
Fourth, employees get the valuable benefit of building their retirement savings with an interest in company stock. When the employee retires, their shares are bought back by the company. Employees with a long-term interest in the company's success may also be more productive. Hiring and training government contract employees requires a substantial investment. With an ESOP, as the employee's ownership interest in the company grows so does the incentive to stay with the company. This helps defense contractors retain top talent even when other employers are offering higher salaries.
Finally, there are also a number of tax advantages for defense contractors that make an ESOP especially attractive. Cash contributions to an ESOP of up to 25% of qualified payroll are tax deductible. Owners may also be able to defer capital gains taxes on the sale of stock to an ESOP. Employees can also take advantage of tax deferral on their ESOP benefits until they take distributions.
If you have any questions about how an ESOP could benefit your company, 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.