A pair of senators have introduced bipartisan legislation aimed at expanding the use of S corporation employee stock ownership plans, or S ESOPs, to encourage more Americans to save for retirement.
The bill, introduced by Sen. Ben Cardin, D-Md., a member of the Senate Finance Committee, along with Sen. Pat Roberts, R-Kan., aims to help more Americans gain retirement savings and security through private employee ownership. A survey released in March by the Employee Benefit Research Institute found that 28 percent of Americans have no confidence they will have enough money to retire comfortably—the highest level in the study's 23-year history.
In addition, a new study released by Alex Brill, a fellow at the American Enterprise Institute and CEO of consulting firm Matrix Global Advisors, found that employee-owned companies that have employee stock ownership plans have demonstrated higher productivity and increased economic resilience despite economic fluctuations.
"Far too many Americans are inadequately prepared for retirement,” Cardin said in a statement. “Our legislation is about helping workers save by giving businesses the tools they need to create jobs and promote adequate retirement savings. It will strengthen a structure that promotes employee-ownership and helps workers build secure retirements. The bill also empowers businesses with the tools they need to access capital, retain workers, and hire new ones; essential to our continued economic recovery."
The Promotion and Expansion of Private Employee Ownership Act of 2013 (S.742) aims to eliminate barriers that a business and its owners currently face in establishing a new S corporation ESOP or expanding the employee-ownership stake in an S corporation. Previous studies have shown that employees of S corporations with employee stock ownership plans have retirement account balances three to five times higher than the average 401 (k) or other defined contribution plans.
Among the provisions in the bill are measures that would encourage owners of S corporations to sell their stock to an ESOP, provide needed technical assistance for companies that may be interested in forming an S ESOP, protect small ESOP-owned businesses from losing their SBA certification when employee ownership of the company expands; and affirm the importance of preserving the S ESOP structure in the Tax Code.
The bill would extend the gain deferral provisions of Section 1042 of the Tax Code 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 corporation 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” (that is, stock or other securities issued by a U.S. operating corporation). After the sale, the ESOP must own at least 30 percent 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. The bill would extend the tax treatment of a sale to a C-corp ESOP to an S-corp ESOP.
Another provision of the bill would create an “S Corporation Employee Ownership Assistance Office” in the Treasury Department to foster increased employee ownership of S corporations. 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. According to the senators, such an office is needed because small businesses often do not have the resources to hire legal advisors or other assistance in making the decision to become an ESOP or to help in the transition to an ESOP.
The bill would also permit a Small Business Administration-certified small business to remain eligible for SBA programs after becoming majority-owned by an ESOP if the employee demographics remain the same. Under current law, a business that is majority-owned by an ESOP is prohibited from qualifying for SBA programs.
Additional co-sponsors of the legislation include Senators Debbie Stabenow, D-Mich., John Thune, R-S.D., Amy Klobuchar, D-Minn., Roy Blunt, R-Mo., and Mary Landrieu, D-La.
"The S ESOP structure in particular has been shown to lead to greater firm longevity and higher wages, wage growth, job stability, retirement plan contributions, employment, and sales than would otherwise have been anticipated," said Alex Brill in the study. "S ESOPs have also proven more resilient in the face of economic distress, outperforming other private U.S. employers during the recent recession."
An ESOP is a qualified defined contribution plan that provides a company's workers with retirement savings through their investments in their employer's stock, at no cost to the worker. The Alex Brill study, Macroeconomic Impact of S ESOPs on the U.S. Economy, details, in 2010, listed a number of positive effects from S ESOPs. S ESOPs directly employed 470,000 workers and supported an additional 940,000 jobs. S ESOPs paid $29 billion in labor income to their own employees, with $48 billion in additional income for supported jobs. Total output was equivalent to 1.7 percent of 2010 U.S. GDP. $93 billion (or 0.6 percent of GDP) came directly from S ESOPs, while output in supported industries totaled $153 billion (or 1.1 percent of GDP). Tax revenue initiated by S ESOPs amounted to $11 billion for state and local governments and $16 billion for the federal government.