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The Employee Ownership Update

Loren Rodgers

November 2, 2017

(Loren Rodgers)

Tax Bill Proposal Does Not Affect ESOPs; Impact on Stock Option Taxation Unclear

The Republican tax proposal released on November 1 does not contain provisions that will directly affect ESOPs. There had been some concern that the plan would make changes to retirement plan law, but no significant modifications were proposed.

The plain language of the bill appears to contain a surprising change to equity plan taxation. It would change current tax rules for restricted stock, stock options, and stock appreciation rights so that the grants are taxed on vesting, not on exercise or, in the case of qualifying dispositions of incentive stock options, upon the sale of the shares. Just the day before, Kevin McCarthy (R-CA) had an op-ed published in the Financial Times saying the bill would incorporate the language of the Empowering Employee Ownership Act (which has passed the House already by a wide margin) that would have delayed taxation on unexercised options in closely held companies for up to seven years after termination of employment. But while the language seems clear enough, stating that "the rights of a person to compensation shall be treated as subject to a substantial risk of forfeiture only if such person's rights to such compensation are conditioned upon the future performance of substantial services by any person," the National Venture Capital Association (NVCA) said that the bill provides that unexercised options are not taxable until they are liquid. It may be that the press release was issued on the assumption that McCarthy's promise would actually show up in the bill—or it could be a drafting error. According to a spokesperson for the NVCA the NCEO contacted, the NVCA still expects that the language of the Empowering Employee Ownership Act will be in the chairman's mark (the legislative draft introduced by the chair of a committee or subcommittee) that comes out after the Ways and Means Committee marks it up.

The bill does contain two provisions that make relatively minor changes in rules that may be of interest to ESOP companies and companies providing equity compensation:

Of course, it expected that changes will be made to the tax bill, so these provisions are just the starting point.

Fidelity Survey: Employees Moving Stock Out of 401(k) Plans While Putting More into ESPPs

A new Fidelity Investments study of Fidelity corporate clients with over $100 million in assets shows that the percentage of companies offering stock in their 401(k) plans dropped from 39% in 2005 to 28% in 2016, while the percentage of employees having company stock in these plans dropped from 41% to 23%. That translated into a drop in 401(k) assets in company stock from 16% in 2005 to 9% in 2016.

At the same time, employees are more active in employee stock purchase plans (ESPPs), with 28% in 2016 in these plans compared to 23% in 2014 (note that not all companies offer these plans; the study does not break the data out by this factor).

A survey done for Fidelity of 2,116 stock plan participants found that 83% were optimistic about their company's stock price. The study also noted that "employees who participate in their company's ESPP are three times more likely to sell company stock for emergency cash rather than take a loan from their 401(k)," and over half (52%) added that it was "highly unlikely" they would tap their 401(k) if they needed cash.

Rhode Island Enacts Pro-Worker Cooperative Legislation

With the signature of Gov. Gina Raimondo (D), Rhode Island adopted legislation designed to promote worker cooperatives in the state. The legislation (read the text here) would increase state incentives for worker cooperatives and simplify the legal process for becoming one. One of the sponsors of the bill, state Sen. Donna Nesselbush (D-Pawtucket), said, "This legislation is about empowering workers and lifting hard-working people toward the American Dream. . . . Worker cooperatives strengthen the community and provide workers with a direct means of bettering one's life by having a true financial role and stake in their daily jobs. Our state could use more of these innovative corporations."

Now Accepting Nominations for the NCEO's Board of Directors

Annual elections for the board of directors of the National Center for Employee Ownership (NCEO) will take place in January, and members in good standing are invited to nominate themselves or other members during the nomination window, from now until December 8. The NCEO's board is actively engaged in many of the organization's activities, from contributing to the content of our research and publications to assisting at the annual conference and finding new members. If you are interested in running for our board, contact NCEO Executive Director Loren Rodgers at or 510-208-1307.

Employee-Owned Company Wins Community Award

Tanimura & Antle, an employee-owned agricultural firm, was recognized for its work to improve the quality of life of its workforce, both by providing housing and by increasing the safety of harvest operations. In an article about the awards, company CEO Rick Antle said:
Never has the phrase 'It takes a village' been truer. I am but one of the 2,500 strong employee owners of Tanimura & Antle who are the real recipients of this recognition. Because of [housing provided at] Spreckels Crossing, we have been able to sustain an agricultural workforce, right here, domestically. But what I am most proud of is that this year, Tanimura & Antle became an employee-owned family farm, allowing employees to earn ownership of our company through their hard work and loyalty. We know our employees are our greatest asset and that their hard work and dedication have helped us to become the vibrant, innovative company that we are today.

Does Your Company Use a Profit Sharing Plan for Employee Ownership?

The NCEO is working on a a publication on employee ownership using profit sharing plans as an alternative to ESOPs. If your company is currently doing this, and would be willing for us to interview you to learn more about what you do, please contact Corey Rosen at

Employee Ownership and Successful Banks

Writing in Banking Exchange, consultant Jeff Gerrish identified 14 characteristics that mark high-performing community banks. He included employee ownership as one of the 14 because, in his words, "I found a positive correlation between high performance and significant employee ownership. Employees having skin in the game, while it may not totally drive performance, will certainly help by aligning in a tangible way the employees' interests with the company's interests."

Author biography and other columns in this series

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