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The Employee Ownership Update

Loren Rodgers

April 16, 2019

(Loren Rodgers)

Promotion and Expansion of Private Employee Ownership Act Introduced in the House of Representatives

U.S. Representatives Ron Kind (D-WI) and Jason Smith (R-MO) introduced the Promotion and Expansion of Private Employee Ownership Act, which will encourage the formation of employee-owned businesses and promote retirement savings through employee stock ownership plans in S corporations. Rep. Kind promoted the bill during a visit to Realityworks, an ESOP company in Eau Claire, Wisc. The bill's companion in the Senate (S.177) was introduced in January by Senators Pat Roberts (R-KS) and Ben Cardin (D-MD).

The bill would extend the deferral of capital gains to qualifying sales to an ESOP of shares in an S corporation, provide technical assistance, clarify that S corporation ESOPs retain their small business status with the SBA, and take other steps to encourage the creation of ESOPs in S corporations.

Massachusetts Relaunches Employee Ownership Office

On April 2, the state of Massachusetts announced that it would restore funding for the Massachusetts Office of Employee Involvement and Ownership. The office will be staffed by two nonprofits, Working Wealth and the ICA Group. David Hammer, the executive director of the ICA Group, says "We really aim to focus on converting existing businesses to employee ownership models, and providing support to these businesses as they build out an employee ownership culture."

IRS "Issue Snapshot" on ESOP Code Section 409(p) Regulation Released

In April, the IRS released an "issue snapshot" on how to prevent violations of Code Section 409(p), the part of the Internal Revenue Code designed to prevent the benefits of an ESOP in an S corporation from being too highly concentrated. The issue snapshot provides no new guidance but does provide an easy-to-follow explanation of Chief Counsel Advice (CCA) Memorandum 201747007 (September 14, 2017), which set out the IRS position on various ways to prevent a nonallocation year in an S corporation ESOP from occurring, such as transferring stock out of accounts of participants who might otherwise be deemed disqualified or excluding allocations to certain highly compensated employees. If a company allocates shares to participants who fall under the definition of a disqualified participant, the law deems this a nonallocation year, and the tax penalties for this are draconian.

Senate Passes Bill That Would Delay Required Minimum Distributions Until Age 72

The "Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019" passed the Senate in April and is expected to pass in the House. It makes many changes to retirement law, but only one is likely to affect ESOPs. The carefully named bill would delay the start date for required minimum distributions from 70 to 72.

Bill Introduced in California to Provide Contracting Preference to ESOPs

California Republican Senator Scott Wilk has introduced SB-553, which would provide 100% ESOP-owned companies with a 3% bid preference on state contracts. The preference is calculated by reducing the bid by 3% of the amount of the lowest responsible bid for purposes of comparing the bid with competing bids. The bill failed on the first vote in committee on a 6-4 vote, but will be reconsidered.

Personal Note on the NCEO Conference

If you were not able to join us last week for our sold-out conference in Pittsburgh, some of the highlights were the record-setting attendance, the buzz of the conversations in the common spaces, and the keynote address facilitated by Christopher Mackin and featuring Heather Braimbridge-Cox (Windings), Gellert Dornay (Axia Home Loans), and Dan Kenary (Massachusetts Bay Brewing Company). Several people have asked to see the video welcomes from Senators Kirsten Gillibrand (D-NY) (available here) and James Risch (R-ID) (available here).

Most people there (59%) were from companies that are employee-owned or are considering becoming employee-owned, and the hometown crowd was large: all fifty states (plus Guam!) were represented, but 12% of attendees were from Pennsylvania.

To the 1,900 of you who joined us in Pittsburgh, thank you. Your energy, passion, and problem-solving make the conference a vibrant, idea-rich experience, and I hope that you left Pittsburgh ready and able to solve new challenges and seize new opportunities.

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