Bill Would Encourage More S Corporation ESOPs

April 17, 2013 ( – New legislation has been introduced in the Senate aimed at helping employees gain retirement savings and security through employee ownership.

U.S. Senators Ben Cardin (D-Maryland) and Pat Roberts (R-Kansas) co-sponsored the Promotion and Expansion of Private Employee Ownership Act. During a media call, Cardin said the legislation will make it easier for S Corporations to sponsor Employee Stock Ownership Plans (ESOPs); it provides parity between S Corporations and C Corporations and establishes a technical assistance office in the U.S. Treasury for establishing ESOPs. 

Cardin said the Senators are supporting this legislation because it will help the economy grow, encourage entrepreneurship and increase employees’ retirement savings. According to Senator Cardin, research indicates employees with ESOPs are much better prepared for retirement, having three to five times more savings than employees with 401(k)s.  

He also noted that ESOPs increase employee productivity and boost the economy. “Where employees have skin in the game, you have companies that will grow and withstand events in the market,” he told the call attendees.  

During the call, hosted by the Employee-Owned S Corporations of America (ESCA), Alex Brill, fellow at the American Enterprise Institute and CEO of consulting firm Matrix Global Advisors, shared results of a newly released study that showed 2,643 S ESOPs directly employed 470,000 workers and supported an additional 940,000 jobs, and that S ESOPs paid $29 billion in labor income to their own employees and $48 billion in additional income for supported jobs. The study report is here.

Pete Strange, chairman emeritus, at Messer, Inc., a construction company, told call attendees that when the company had a family-owned structure, its retirement plan had an average participant account balance of about $15,000. In 1990, with the passage of new legislation, Messer established an ESOP, and the average account balance in the ESOP is $250,000. “We are confident employees will have sustainable retirements,” he said.  

More specific details about the legislation (S.742) include: 

  • Section 3 of the bill would extend the gain deferral provisions of Section 1042 to sales of employer stock to S-ESOPs—Under current law, Section 1042 allows an individual owner of stock in a non-publicly traded C-corp that sponsors an ESOP to elect to defer the recognition of gain from the sale of such stock to the ESOP if the seller reinvests the sales proceeds into “qualified replacement property” (i.e., stock or other securities issued by a U.S. operating corporation). After the sale, the ESOP must own at least 30% of the employer corporation’s stock. The deferred gain from the sale of employer stock to an ESOP generally must be recognized upon a subsequent sale or exchange of the qualified replacement property. This section extends the tax treatment of a sale to a C-corp ESOP to an S-corp ESOP. 
  • Section 4 of the bill would create an “S Corporation Employee Ownership Assistance Office” in the Department of Treasury to foster increased employee ownership of S-corps—The office would provide education and outreach to inform people about the possibilities and benefits of employee ownership of S-corps and provide technical assistance to companies that may be interested in forming an S-ESOP. The office is needed because small businesses often do not have the resources to hire legal advisers or other assistance in making the decision to become an ESOP or to help in the transition to an ESOP. 
  • Section 5 would permit a Small Business Administration (SBA) certified small business to remain eligible for SBA programs after becoming majority-owned by an ESOP if employee demographics remain the same.