The Employee Ownership Update
October 16, 2017
DOL Enters into New Process Agreement with ESOP TrusteeIn an agreement flowing out of Acosta v. Bat Masonry Company (W.D. Va. Sept. 29, 2017), the Department of Labor and ESOP trustee James Joyner entered into a process agreement that very closely mirrors the 2014 GreatBanc process agreement. Joyner will pay $15,000 in the settlement in a case involving an alleged overvaluation of shares. Charges against other defendants are still pending, although two other prior settlements with defendants also were concluded for nominal sums. Joyner had acted as a trustee in the case.
The process agreement with Joyner adds only a few new elements to the GreatBanc agreement, most notably about ensuring the independence of the valuation advisor and the reliability of financial information provided to the trustee. For example:
- The agreement increases the time period during which an appraiser cannot have previously worked with the trustee; the vetting process must be repeated if it is more than 24 months old instead of 15.
- The agreement tightens language concerning when it is appropriate to use unaudited statements.
- It adds a requirement that the trustee obtain fiduciary insurance or be a named fiduciary under the sponsor's policy. Joyner worked as an individual outside trustee; institutional trustees would have their own insurance.
Commentary: Tax Reform and Employee OwnershipTwo recent articles looked at the interaction between tax reform and employee ownership.
In a commentary on Fortune magazine's website, How Congress Can Pass Tax Reform That Actually Helps the Middle Class, Joseph Blasi and Douglas Kruse make the case that "The Trump administration's tax proposal reduces tax rates for corporations and for high-income individuals, but does not do much to increase the wealth of the middle class. The only way it could do that is by reducing taxes for companies that share profits or stock with employees." The authors make the case for the longstanding historical bipartisan roots of employee ownership, and call for "constructive Republicans and Democrats on the tax committees in the House and Senate to join together to design this workable bipartisan idea into realistic legislation."
Conservative support for ESOP tax rules will be critical in any tax reform, so it was encouraging that Ike Brannon, a visiting policy fellow at the Cato Institute, wrote a full-throated endorsement of the idea on the website of The Weekly Standard. Bannon's article, "How We Tax Employee-Ownership is One Thing our Screwed Up Tax Code Actually Gets Right," argues ESOPs are well worth their tax cost. He writes, "there's one area the tax code actually gets pretty much right: the taxation of S corporations and, in particular, S corporation employee stock ownership plans. While the tax code imposes double taxation on most corporations, taxing both profits of the firm and the proceeds paid to shareholders as dividends, S corporation profits are taxed only once, at the same rate as the other taxable income each shareholder earns."
Legislators Making the Case for Employee OwnershipSenator Kirsten Gillibrand (D-NY), one of the four sponsors of the pro-employee-ownership WORK Act (along with Maggie Hassan [D-NH], Bernie Sanders [I-VT], and Patrick Leahy [D-VT]), is promoting employee ownership, including paying a visit to ESOP-owned company Once Again Nut Butter. Reporter Ben Beagle notes that Sen. Gillibrand said "she hopes to introduce several pieces of legislation by the end of the year that offer incentives for employee-ownership and profit-sharing, among other models."
A cosponsor of the WORK Act in the House of Representatives, Jared Polis (D-CO), wrote an op-ed in the Longmont (CO) Times Call supporting the legislation, saying, "our democracy can only thrive when the middle class thrives, as the engine of our country. Employee-owned businesses are one way we can ensure more people have a fair shot at the American Dream and increase overall productivity."