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ESOPs: Legislative Updates

Posted by Marc S. Schechter | Feb 21, 2018

For anyone watching the latest in Employee Stock Ownership Plans (ESOP), there has been a lot of legislative action taking place at the federal and state level in recent months. Politicians on both sides have been promoting ESOPs as a way to increase economic growth and opportunity for employees in a variety of industries.

The National Defense Authorization Act of 2017, which deals primarily with defense issue, has been updated to include certain ESOPs as falling within the category of small business concerns owned and controlled by service-disabled veterans. In calculating the 51% minimum veteran ownership, these businesses can now disregard the percentage of ESOP stock ownership.

This change effectively opens up more partial employee-owned businesses to defense contracting preferences. A small, majority veteran-owned business will not be penalized for providing employee-ownership interest in the company through an ESOP. With a number of service-disabled veteran businesses here in San Diego, this could increase the potential interest in ESOPs for small defense contracting companies in the area.

The Promotion and Expansion of Private Employee Ownership Act

Other pending legislation makes minor changes in tax law to conform how different corporations deal with ESOPs. H.R. 2092 would potentially increase the number of S Corp ESOPs. This allows S Corp owners to get the same type of ESOP stock sale tax deferrals that are currently allowed for C corps. This bill would also allow financial institutions to deduct half of the interest income received from ESOP loans for S Corps that own more than 50% of stock. 

The Work Act

Senate Bill 1081, known as The Work Act, sponsored by Bernie Sanders, Elizabeth Warren, and Sherrod Brown, is intended to increase the number of employee-owned businesses across the country. Modeled after a Vermont bill, the act would provide funding and support, “to establish and expand employee ownership centers, which provide training and technical support for programs promoting employee ownership.”

United States Employee Ownership Bank Act

Another bill, introduced in the House and Senate, would “create a U.S. Employee Ownership Bank to provide $500 million in low-interest rate loans and other financial assistance to help workers purchase businesses through an employee stock ownership plan or a worker-owned cooperative.”

According to the sponsors, together, The Work Act and Employee Ownership Bank Act would expand employee ownership and participation. “These are constructive steps to strengthen and expand worker-ownership opportunities and Employee Stock Ownership Plans (ESOPs),” said Senator Patrick Leahy of Vermont, one of the sponsors.

According to a study by Rutgers University, employee ownership benefits employees, shareholders, and the company overall. “Employee ownership increases company productivity by 4%, shareholder returns by 2%, and profits by 14%.”

If you have any questions about the benefits and drawbacks of an ESOP for 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.

About the Author

Marc S. Schechter

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


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