The Employee Ownership Update
November 15, 2017
After Last-Minute Reversals, Current Tax Reform Now Supports Broad-Based Equity CompensationAs of a few days ago, it appeared that the new tax reform bills in both the House and the Senate would tax equity compensation grants when they vested. The House version applied to all equity grants; the Senate version excluded qualifying dispositions on incentive stock options and employee stock purchase plan (ESPP) shares. The provisions would dramatically reduce the incentives for companies to use broad-based equity compensation. But now both the Senate (in the new Chairman's Mark being marked up as this is being posted) and the House have dropped these provisions. The original inclusion of the provisions came as a complete surprise to people working in the field; the deletion of the provisions came with no more explanation than their inclusion.
The bills now both include a modified version of the Empowering Employee Ownership Act (EEOA), explained in more detail below. For private companies that provide broad-based equity awards that are not liquid, the EEOA would allow employees up to five years after termination of employment to sell their shares before paying taxes.
Under the new rules, employees with stock options and restricted stock units could make an election to defer tax not less than 30 days before an award is fully vested or becomes transferable, even if they have left the company. They would not have to pay taxes until the earliest of the events listed below:
- The date when the shares are publicly traded.
- The date that is five years after the first date the rights of the employee in such stock are transferable or are not subject to a substantial risk of forfeiture, whichever occurs earlier.
- The date the employee revokes the special tax status of the award.
- The date on which the employee becomes an "excluded employee."
The new provisions would have limited applicability—most plans in private companies are not sufficiently broad-based to qualify, and many that are use synthetic equity arrangements or restricted stock grants not covered by this law, or provide vesting on liquidity.
In the Press: Baby Boomer RetirementWriting in the Detroit Free Press on November 12, John Gallagher's article Silver Tsunami: Retirements put boomer-owned firms at risk but worker ownership can help notes that as many as 400,000 jobs in the metro Detroit area could be at risk if baby boomers are not able to find a way for their businesses to continue after they retire. As an alternative, Gallagher tells the story of Russ Hart, who sold shares in the firm he founded, Arbor Assays, to the employees after the phrase "employee-owned" on a bottle of Harpoon beer got him thinking. He said:
My son is a pilot, my daughter is an attorney, and neither one of them wanted to take over this business. The other typical option for a company like this is to sell it. And in almost all of the sales of companies like that, we've seen the employees tend to get laid off and the whole atmosphere of the company changes dramatically. We didn't want to see that happen. So the idea of employee ownership seemed like a leap forward.