ESOPs are a powerful tool for businesses, as they can help to align the interests of employees with those of the company and can also serve as a means of attracting and retaining top talent. The United States Congress recognized these advantages when they passed the 2023 Omnibus Bill, a comprehensive spending bill that funds the federal government for fiscal year 2023, and contains provisions relating to employee stock ownership plans. The Menke Group applauds these developments for businesses and workers and sees them as important spurs for a new decade of ESOP adoption.
The 2023 Omnibus Bill contains several positive provisions for ESOPs – more educational resources for businesses and workers and greater transparency and consistency in valuations bring more awareness and more clarity to the process of creating and administering an ESOP.
The 2023 Omnibus Bill contains two provisions related to ESOPs, the WORK Act and the SECURE 2.0 Act. These provisions are designed to increase education on employee ownership and to create more consistency in the valuation process.
The WORK Act
The WORK Act, sponsored by Senators Bernie Sanders of Vermont and Jerry Moran of Kansas, is modeled on successful employee ownership centers in Ohio and Vermont. The act authorizes a $50 million grant program administered by the US Department of Labor for state and local governments to improve knowledge on the topic of ESOPs. If states do not apply for funding within a year, then nonprofits can apply on behalf of that state to provide educational resources via employee ownership centers.
A second provision of the WORK Act directs the Department of Labor to create regulations for appraising the value of company stock that will be sold to ESOP plans. There are only “interim” guidelines in place currently for these valuations, and having final regulations will create more legal certainty for ESOP sponsors.
Industry sources applauded Senator Sanders’ dedication to bringing the WORK Act to fruition. “On behalf of the more than 10 million American households that already benefit from an ESOP, we are deeply grateful to Sen. Sanders for his dedication to include the WORK Act in the omnibus,” said Jim Bonham, President and CEO of The ESOP Association. “More employee owned businesses mean more stable local jobs, higher incomes, increased retirement savings, better work environments, and more productivity for our economy. This is how American capitalism is supposed to work – by including everyone.”
The SECURE 2.0 Act
The second provision related to ESOPs in the 2023 Omnibus Bill is the SECURE 2.0 Act, which also contains two parts. The first part of the SECURE 2.0 Act extends Internal Revenue Code Section 1042 tax deferral treatment to S corporation shareholders when selling stock to an ESOP, as long as those gains are invested in stocks or bonds of another U.S. company.
Currently, only shareholders of C corporations can benefit from this tax treatment. The SECURE 2.0 Act begins to address this disparity by allowing shareholders of S corporations to defer 10% of their gains from selling stock to an ESOP. Shareholders of C corporations, however, are allowed to defer 100% of their tax liability. According to industry sources, the 10% deferral of tax liability for S corporation shareholders reduces the cost of the bill by decreasing the government’s exposure to lost tax revenue.
This disparity could change in the future as according to an unidentified aide at the House Ways and Means Committee, there is interest in achieving tax treatment parity for S and C corporations. At this time, however, the government “can only afford 10%.”
The SECURE 2.0 Act also addresses valuation for shares of an ESOP stock that trade on unlisted venues. If adequate trading frequency for those stocks are present on an unlisted venue, then those shares would not need a formal appraisal to set their value.
In summary, the 2023 Omnibus Bill contains several positive provisions for ESOPs. More educational resources for businesses and workers and greater transparency and consistency in valuations bring more awareness and more clarity to the process of creating and administering an ESOP. As a result, more business owners will enjoy the benefits of an ESOP, and employees will have stronger savings for retirement. Indeed, the passage of the 2023 Omnibus Bill may well usher in the decade of the ESOP, and the Menke Group is excited to help make that happen.
Phil DeDominicis is an ESOP strategist and M&A advisor who has guided 300+ companies through ESOP formations, financing, and transactions over 20+ years at Menke & Associates. He specializes in selling ESOP‑owned businesses to financial or strategic buyers and in helping ESOP companies acquire other businesses.
