New Bill Would Largely Remove Limits on ESOP Contributions and Allocations

Rep. Perry Scott (R-PA) introduced the Employee Ownership Fairness Act of 2026 in the House on July 20. The bill is a companion to the Employee Ownership Fairness Act of 2025, introduced by Sen. Bill Cassidy (R-LA) in the Senate on May 13, 2025, and discussed on this blog at that time. The bills would largely remove limits on ESOP contributions and allocations.

Presently, Internal Revenue Code Section 404 limits all deductible employer contributions to defined contribution plans to 25% of eligible compensation (which omits pay over an inflation-adjusted limit that is currently $360,000) of plan participants. IRS private letter rulings allow C corporations with leveraged ESOPs to use separate 25% limits for (1) employer contributions to repay ESOP loan principal and (2) employer contributions to other defined contribution plans, including a nonleveraged component of an ESOP; however, only about one-third of ESOPs are in C corporations.

For any given participant's individual accounts in ESOPs, 401(k)s, and other defined contribution plans, Internal Revenue Code Section 415 limits the aggregate annual additions to all such accounts, including employee contributions, to the lesser of 100% of their pay or an inflation-adjusted amount that is currently $72,000. (This excludes participant "catch-up" contributions to plans with elective salary deferrals, such as 401(k) plans.)

Currently, some ESOPs use extended internal loan terms to stay under the limits by decreasing the amounts to be contributed and allocated each year.  

The new bill would largely remove these limits for ESOPs by excluding from the Section 404 and 415 limits (1) contributions of employer stock and (2) contributions made to repay loans used to acquire employer stock. Section 404's limits would be applied separately to ESOPs and to any other defined contribution plans, and forfeitures reallocated to other accounts would not be counted as annual additions under Section 415. (Under existing law, there is a Section 415 exception for forfeitures, but only in C corporations where ESOP loan-acquired shares are forfeited while the loan is being repaid.)

The bill notes that the current limits "impede the ability for ESOP employees to diversify their retirement savings and make their own retirement savings contributions and often require their employers to deny matching contributions they would otherwise receive." Presently, since Section 415 imposes a combined limit for employer and employee contributions, it is possible for employees wishing to make 401(k) deferrals to be thwarted by the limits due to employer allocations from ESOPs and other plans.