PLANSPONSOR - April/May 2019 - 17

ESOPs for Retirement and Succession
A TRUE employee stock ownership
plan (ESOP) is one in which all eligible
employees-from rank and file to
managers and owners-have an ownership
interest in the company through the
plan, which, except for a little cash, has
company stock as the sole investment.
Mark Kossow, a member at Clark
Hill law firm, whose practice focuses on
ESOPs, notes that empirical evidence
indicates ESOP-owned companies are
more profitable. " The value of the benefit
as a retirement plan will be beneficial to
employees and employers, " he says.
According to Joanne Swerdlin, executive
vice president, Swerdlin & Co., an
Ascensus company, there are more plan
assets in ESOP accounts in the U.S. today
than there have ever been before, and the
plans increasingly create wealth for more
people daily.
Swerdlin says ESOPs operate successfully
across a broad range of industries-
but the ideal private company candidate for
an ESOP is one that has strong cash flow,
a history of increasing sales and profits,
is in a high federal income tax bracket, is
not heavily leveraged and has substantial
stockholder equity plus capable secondline
management in place.
Business owners with paternalistic
feelings for employees are prime candidates
for ESOPs, says Kossow. When
business owners sell to a third party, that
entity may consolidate operations, move
the company elsewhere, lay off employees
or change the company name. " It could
hurt employees. When owners sponsor an
ESOP, they have full control of the future
of their organization, " he says.
Lisë Stewart, director of the Center for
Family Business Excellence at accounting
firm EisnerAmper, says having loyal,
effective managers can make a difference
for some owners considering an ESOP.
" We've found that employers who don't
believe they have family members who
are interested or eligible to take over the
business, but have viable managers in the
company who are interested in running
and owning it but lack the financial
resources, are more likely to consider an
ESOP, " Stewart says.
Stewart explains. The owner sells his stock
in a tax-free transfer, and the employees
can save proceeds on a pre-tax basis. It also
allows for a gradual transition of control
throughout the transfer and may last
indefinitely if the owner or owners decide
to retain some of the stock. It can be an
" When owners sponsor an ESOP,
they have full control of the future
of their organization. "
In addition, the current owners need
to be able to withstand the slower payout
period and be willing to give up the leadership
of the company as the stock transfers
to the employees, she says.
" Over the past 35 years, approximately
40,000 U.S. companies have decided to
engage in the ESOP process, often because
they can create some shareholder liquidity,
without selling all of the company[-a
partial ESOP], " she continues. " Therefore,
they get the cash but don't have to relinquish
full control of the business. This is
a very attractive option for many owners. "
ESOPs offer multiple tax advantages
for both seller and new employee-owners,
TALKING POINT
TDFs as a Spending Solution
Eight in 10 plan sponsors agree that " plan
participants would benefit from a TDF
[target-date fund] with a feature that
generates guaranteed retirement income. "
Seventy-eight percent-vs. 57% last year-
have already put that belief to work.
Source: BlackRock, 2019 DC Pulse Survey
PLANSPONSOR.com April - May 2019 17
opportunity to train the emerging leaders
and enhance their management skills,
plus engage employees across the organization
over a reasonable amount of time,
maintaining stability.
Swerdlin points out that Internal
Revenue Code (IRC) Section 4975 permits
ESOPs to borrow funds to purchase those
securities from a company or a shareholder
without incurring a prohibited
transaction violation. " These applications
under IRC Section 4975 give an ESOP its
unique ability to serve as a tax-efficient,
ready-made market to buy out shareholders
one at a time, " she says.
-Rebecca Moore
http://www.plansponsordigital.com/plansponsor/april-may_2019/TrackLink.action?pageName=17&exitLink=http%3A%2F%2FPLANSPONSOR.com
PLANSPONSOR - April/May 2019

Table of Contents for the Digital Edition of PLANSPONSOR - April/May 2019
