PLANSPONSOR - December 2022-February 2023 - 37

OPINION
" The main
barrier to there
being more
ESOPs is that
the owners this
could work for
often don't know
this type of plan
even exists ... "
the company might not be retained by the
buyer; the buyer might move the company,
and it might change the values they've
built the company around.
The advantages so important here
are that, No. 1, this is a stock redemption,
and this is true for public companies, too.
Normally, stock redemptions are not tax
deductible. When companies use an ESOP
for a stock redemption, you get a tax deduction.
That amounts to a lot of saved costs.
Second, the seller can defer capital
gains tax on the sale by reinvesting in
stocks and bonds of other companies-
there's no other legal way to do that.
And lastly, it's an advantage for companies
that are or become S corporations. In
an S corporation, the company doesn't pay
taxes; it passes the obligation [pro rata] to
its owners. In an S corporation ESOP, to
the extent that the ESOP is an owner, its
share of the profits is not taxable. If you're
100% ESOP, you don't pay any income
taxes. That's why most private companies
either are or will be 100% ESOP.
PS: There's been considerable new research
on ESOPs. What are some highlights?
ROSEN: At NCEO, we do a lot of research.
The most important study we've done-
or anyone has done on ESOPs-is a 2021
study with support from Employee-Owned
S Corporations of America. The study
found that workers with an ESOP at an S
corporation had more retirement savings
and more employer-side retirement contributions
both before and during COVID19,
compared with similar companies
offering only a 401(k) plan. The mean
account balance in an ESOP was $132,000,
and most of the companies had a 401(k)
plan, too. In comparison companies, the
total retirement accounts were worth only
a mean of $65,000. S ESOP companies'
retirement contributions were 2.6 times
that of companies offering only a 401(k)
plan. Additionally, 94% of contributions to
these ESOPs were from employers, vs. 31%
from employers to 401(k) plans in comparison
companies.
PS: Do ESOP-sponsoring companies perform
better because employees are more
invested in the progress of the company?
ROSEN: What we found in decades of
research is that the best companies are
those that generate the most ideas from
the most people about the most things.
This concept has become the conventional
wisdom in ESOPs. Employees are given
not just the opportunity but the structure
and expectation for how to share ideas and
identify problems.
For instance, the employees at
Hypertherm, a very successful 100%
ESOP, generate two to three ideas per
employee per year through the company's
employee involvement system. You
can imagine the difference it makes in
corporate performance when you have
that, versus the company that gets few, or
discourages or doesn't allow, ideas.
We've found that companies that set
high-involvement
up
systems without
sharing ownership with employees tend
to be ephemeral. When management
changes, the systems go away.
With the great resignation that everybody's
facing right now, ESOP companies
are much more successful and stable.
This is partly because of culture and partly
because people have a reason to stay.
PS: What is the current legislative environment
for ESOPs?
ROSEN: There's more momentum legislatively
behind ESOPs now than there has
been in decades. It's encouraging.
There is new legislation at both the
state and the federal level. To give readers
some idea, the California Employee
Ownership Act passed [in 2022], creating
an office of employee ownership in the
state. Several other states are following suit.
For example, the similar Pennsylvania bill
includes six sources of significant funding
for ESOP programs, outreach programs
and financial support; it apparently has a
good chance of passing.
The [recently passed] omnibus
spending bill includes the Worker Ownership,
Readiness and Knowledge Act, which
is the most important pro-employeeownership
legislation in 25 years. It will
provide funding for every state to set up an
education, training and outreach program
on employee ownership and will require
the Department of Labor to set new standards
for ESOP appraisals.
Existing state programs have been
very effective in addressing the knowledge
gap that leads to many business owners
who might choose to set up an ESOP for
business transition instead selling to
someone else. The main barrier to there
being more ESOPs is that the owners this
could work for often don't know this type of
plan even exists or, if they think they know,
their information is wrong. Education will
be tremendously helpful.
Corey Rosen is founder and senior staff member of the National
Center for Employee Ownership, a nonprofit information,
membership and research organization, in San Rafael,
California. Rosen, along with John Case, recently published
" Ownership: Reinventing Companies, Capitalism, and Who
Owns What, " arguing that employee ownership is an essential
approach to making capitalism work for all Americans.
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