ESOPs, Employee Ownership Score Major Victories in Congress

The ESOP Association Helps Secure Critical Provisions in Year-End Omnibus Legislation

Washington, D.C. – Congressional negotiators early this morning released the Consolidated Appropriations Act of 2023 which includes numerous top priority provisions sought by The ESOP Association on behalf of its membership. Included in the bill is a new pro-employee ownership program within the U.S. Department of Labor including more than $50 million in funding over five years, a requirement to provide formal guidance on the valuation of company shares to be bought by an ESOP, an expansion of the 1042 tax benefit to S-corporations, and others. 

“This is one of the most consequential pieces of legislation supporting ESOPs in decades,” said Jim Bonham, President and CEO of The ESOP Association. “The bill will more properly align the community with its primary regulator, the Department of Labor, through the creation of a supportive program within the agency and the promulgation of formal guidance on the valuation of company shares to be bought by an ESOP. The valuation issue has remained ambiguous for nearly fifty years and has created unnecessary friction between DOL and ESOPs. We very much look forward to a strong working partnership with DOL and Treasury to develop these new regulations once the bill becomes law.”

For the past two years, The ESOP Association has made passage of the “WORK” Act, jointly sponsored by Sen. Bernie Sanders (I-VT) and Sen. Jerry Moran (R-KS), a top priority to build a more favorable regulatory environment as well as promote employee ownership throughout the nation by utilizing state grants for education, programs, and feasibility studies. The creation of an Employee Ownership Initiative office within the Department of Labor will help increase awareness of and promote ESOPs and employee ownership. The legislation authorizes $50 million over five years for the establishment of a grant program for states and localities to use for education and outreach. This marks the first federal grant program at the Department of Labor specifically dedicated to promoting employee ownership.

Embedded in the WORK Act provisions of the omnibus are new rulemaking requirements that the Secretary of Labor must meet, including formal guidance on proper standards and procedures to determine good faith fair market value for shares of a company to be bought by an ESOP. 

“The single greatest point of friction with DOL has been around the valuation of shares to be bought by an ESOP,” Bonham continued. “It is an excellent development that Congress has now joined the ESOP community by directing DOL to finally provide the formal guidance that ERISA required nearly 50 years ago.”

A second major priority of the Association has been the long-sought expansion of Section 1042 tax treatment for S-corporations forming an ESOP. Starting in 2028, S-corps will begin to take advantage of new tax savings opportunities created by the bill. Currently, only C-corporations may defer recognition of gains from a sale to an ESOP, which creates a disincentive for S-corp ESOP formation. The omnibus provides for a 10 percent deferral on sales of employer stock to an S-corporation ESOP.

“The tax treatment provisions are a major first step forward in establishing parity for S-corporations sponsoring an ESOP,” Bonham added. “It’s highly encouraging that Congress has recognized the current disparity, and we will continue to advocate for a greater expansion that would significantly increase the attractiveness for S-corporations to form ESOPs.”

The Senate is expected to vote on the omnibus legislation, which also funds the federal government for the 2023 fiscal year, in the coming days, followed by the House of Representatives. The legislation is expected to pass by week’s end.

“The provisions included in the omnibus are the clearest signal yet that Congress is committed to strengthening employee ownership in America, and doing so in a cooperative, bipartisan way,” Bonham said. “With this legislation, The ESOP Association has achieved a major portion of our longstanding policy agenda in Washington. While there is still much work to be done to secure the future of employee ownership, the wins in this bill are crucial to our efforts. We sincerely thank all our champions in Congress who support ESOPs and employee ownership, and who worked so diligently to help millions of American employee owners.”

About the ESOP Association 

The ESOP Association is the largest organization in the world supporting employee-owned companies, the more than 10 million U.S. employees who participate in an ESOP, and the professionals who provide services to them. Headquartered at the International Employee Ownership Center in Washington, DC and operating as a 501(c)6 organization with the affiliated Employee Ownership Foundation, The ESOP Association conducts and funds academic research, provides more than 160 annual conferences and events attended by nearly 15,000 individuals, and advocates on behalf of employee owners and their businesses to federal and state lawmakers.

For Media Inquiries, Contact: 

Demetrios Karoutsos
Senior Director, Marketing & Communications 
dkaroutsos@esopassociation.org