Research Touts Major Benefits of S-ESOPs

July 29, 2008 (PLANSPONSOR.com) - Two university researchers assert in a new study that Subchapter S companies with an employee stock ownership plan (ESOP) have created a windfall for employers and workers alike.

Michael Knoll and Steven Freeman, both from the University of Pennsylvania, claimed in their research that the S ESOPs generate 85,000 jobs annually as well as $14 billion in employee savings. S ESOPs also offer workers higher job stability, which accounts for $3 billion worth of the employees’ savings, Knoll and Freeman said.

Moreover, the researchers¬†found higher productivity, profitability, job stability, and job growth collectively help ESOP companies amass $33 billion more in combined earnings than what they would earn if they were not ESOP-owned S corporations. “From a long-term societal perspective,” wrote Knoll and Freeman, “it is perhaps the best possible gain: a forced retirement plan.”

Knoll and Freeman asserted that the current-law tax benefits for S ESOP companies have increased tax collections from both employees and employers. This, the authors report, is largely because the additional wealth created by S ESOPs generates additional federal and state taxes; because S ESOPs do not expand capacity among deferred-tax savings options (such as 401k’s and others); and because workers pay taxes on their S ESOP savings accounts when they are liquidated at rates substantially higher than what are paid on other tax-deferred plans.

According to the researchers, Congressional passage of laws allowing for S ESOPs more than a decade ago has led to the creation of nearly 3,700 S ESOP companies nationwide (about 40% of all U.S. ESOPs), and that about 3.7 million Americans participate in S ESOPs.

The authors point out that S corporation ESOPs have been in the news with the 2007 announcement by Chicago financier Sam Zell that he was acquiring the iconic Tribune Company and converting it to an S-ESOP company.

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