Proposed Federal Acquisition Regulation Detrimental to ESOPs Withdrawn

A proposed federal acquisition regulation (FAR Case 92-24) that would have limited the ability of government contractors to fund ESOPs has been withdrawn. The proposal would have limited the amount the government will reimburse government contractors for their contributions to ESOPs to 15% of covered pay and would have given no reimbursement on the interest on ESOP loans. The proposed regulation was based on the argument that in many ESOPs, interest payments dwarf principal payments and, in any event, do not release any additional shares to employees. Moreover, some government contractors were concerned ESOPs were being used to acquire other companies or buy out owners, with the government picking up the tab.

The proposal generated considerable opposition in the ESOP community. In an analysis prepared on the issue by the NCEO, we pointed out that in a typical ESOP loan, interest payments generally are only about 50-60% of total principal payments over the loan's term. Moreover, the total cost to the government of a leveraged ESOP and a non-leveraged ESOP acquiring the same number of shares over the same period of time would be about equal.

On March 12th, the General Services Administration, NASA, and the Department of Defense, the three agencies that make acquisition rules, withdrew the proposal.