Congress has been very supportive of employee stock ownership plans (ESOPs) since their creation in 1974. Multiple tax incentives have been added, although some were later repealed. In addition, there have been two laws to facilitate Small Business Administration (SBA) financing for ESOPs, two to mandate ESOPs as part of government bailouts of private companies, and one to limit abuses of S corporation ESOP tax incentives. This summary provides a very brief description of these laws, plus related legislation on employee ownership in general. The laws contain many technical provisions not included in this summary.
Some of these laws were amendments to the Employee Retirement Income Security Act (ERISA), but most either amended the Internal Revenue Code (the “Code”) or dealt with specific agencies. This article only provides brief descriptions of what are often complex laws. At the end of the article, there is a section on currently pending legislation.
Enacted Legislation
1973: The Regional Railroad Reorganization Act
The first mention of ESOPs in federal law was the 1973 Regional Railroad Reorganization Act, which created Conrail to subsume a number of railroads into a single company. Under this legislation, Conrail was required to set up an ESOP that would own 15% of Conrail stock, with the government owning the rest. The government later disposed of its stock, and Conrail went public in 1987.
1974: The Employee Retirement Income Security Act (ERISA)
ERISA was a major legislative overhaul of retirement, health, and other employee benefit plans designed to deal with various abusive practices, especially in pension plans. ERISA essentially codified the existing ESOP model by making it part of retirement plan law and subject to most of the same requirements for eligibility, vesting, and allocation as other plans. ESOPs were allowed a longer distribution schedule than other defined contribution plans, however. Critically, ERISA stated that ESOPs were exempt from the normal prohibited transaction rules that prevented retirement plans from purchasing shares from a party in interest (an existing owner) and from borrowing money. ERISA also exempted ESOPs from normal diversification rules by requiring that they be invested primarily in company stock. ERISA did not add any new tax benefits, which at the time were primarily limited to the deductibility of contributions to the plan up to a limit of 15% of eligible pay, but it did make it clear that this was the law and not something to be applied case by case. ERISA also established that the trustee of the ESOP was the legal owner.
1975: Tax Reduction Act
This law created the Tax Reduction Act ESOP (TRASOP) by providing an additional 1% tax credit for qualifying capital investments if the company contributed an equivalent amount of stock to an ESOP.
1978: The Revenue Act
The Revenue Act of 1978 created Section 409(A) of ERISA, which spelled out for the first time the requirement that shares in a private company be subject to a fair market valuation. It codified regulations for TRASOPs and specified that distributions could be made in cash or in stock, but the employee must have a put option for stock distributions. Employees must be able, however, to demand that distributions be made in the form of shares.
1979: The Technical Corrections Act
The Technical Corrections Act of 1979 clarified an uncertain area of the law by stating that leveraged ESOPs were subject to the same 409(A) rules as other ESOPs.
1979: The Chrysler Loan Guarantee Act
The Chrysler Loan Guarantee Act provided emergency credit to rescue Chrysler from bankruptcy. As part of that, it required Chrysler to set up an ESOP with $162.5 million.
1980: The Small Business Employee Stock Ownership Plan Act
The Small Business Employee Stock Ownership Plan Act provided that the SBA would be able to make loans directly to the ESOP trust. At the time, loans directly to the ESOP trust were the norm, but the SBA had ruled that such loans were impermissible because the trust was not a small business. The SBA largely ignored the law, however.
1981: The Economic Recovery Act
The Economic Recovery Act of 1981 eliminated TRASOPs and replaced them with Payroll-Based ESOPs (PAYSOPs), providing the employer with a 0.5% credit against payroll for contributions to an ESOP. The law provided that companies with a majority of their stock held by employees could require that distributions be made in cash, a change from existing rules.
1984: The Tax Reform Act
The Tax Reform Act of 1984 added the most significant ESOP-specific tax benefits. These included:
- Code Section 1042: Allowed sellers to a worker cooperative or to an ESOP owning at least 30% of the stock in a C corporation to defer capital gains taxes by investing in stock and bonds of US operating companies.
- Code Section 133: Allowed lenders to ESOPs to exclude 50% of the interest income from their taxable income for loans to an ESOP.
- Code Section 404(k): Provided that dividends passed through to employees would be tax-deductible.
- The tax credit for PAYSOPs was frozen until 1987.
1986: The Tax Reform Act
The Tax Reform Act of 1986 made a number of changes to ESOPs, most notably:
- Permitted the exclusion of 50% of the qualified proceeds from a qualified sale of employer securities from an estate to an ESOP or a worker cooperative.
- Modified the 50% exclusion on interest income from loans to ESOPs to apply only to loans to the trust of seven years or less.
1989: Omnibus Budget Reconciliation Act
The Omnibus Budget Reconciliation Act of 1989 limited the 50% interest income exclusion on ESOP loans to ESOPs that acquired at least 50% of the stock in the company. It also repealed the estate tax exclusion for sales to an ESOP.
1996: The Small Business Job Protection Act
The Small Business Job Protection Act provided that S corporations could have ESOP trusts as owners, provided the ESOP trust paid unrelated business income tax on its pro-rata share of profits.
1997: Taxpayer Relief Act
This bill repealed the unrelated business tax requirement for ESOP trusts in S corporations, meaning that profits attributable to the ESOP’s ownership would not be subject to income tax.
2001: The Economic Growth and Tax Relief Reconciliation Act
In response to abuses of the S ESOP corporation tax benefit, this law created a set of S corporation ESOP anti-abuse requirements (Section 409(p)) designed to prevent ownership from being concentrated in the hands of a limited number of people.
The bill also increased the percentage of compensation that could be contributed to ESOPs from 15% to 25% of eligible pay.
2006: Pension Protection Act
The Pension Protection Act of 2006 required that employees be able to move employer stock out of their 401(k) plans and ESOPs. For employer non-elective or matching contributions, the diversification requirements apply after the participant has completed at least three years of service. For elective deferrals and after-tax contributions, the diversification requirements apply immediately. Stand-alone ESOPs without elective employee or matching contributions were excluded from the new diversification rule.
The bill also shortened the maximum vesting period for all defined contribution plans to six years.
2018: The Main Street Employee Ownership Act
The Main Street Employee Ownership Act updated rules for the Small Business Administration to make lending to ESOPs more practical than under existing rules. The SBA issued operating procedures, however, that largely vitiated congressional intent.
2021: The National Defense Authorization Act
The National Defense Authorization Act of 2021 contained the first-ever government contracting program to specifically encourage ESOPs. Under a five-year pilot program, Department of Defense contracting companies that are 100% ESOP-owned qualify for noncompete follow-on contracts for the work.
The bill also directed the Department of Defense to look at “acquisition authorities that could be used to incentivize businesses to become qualified businesses wholly owned through ESOPs and to overcome challenges to partnering with the Department.”
2021: The State Small Business Credit Initiative
The American Rescue Plan Act of 2021 included an appropriation of $10 billion for another round of funding for the State Small Business Credit Initiative (SSBCI), a program that has been in place since 2010. The SSBCI program was created to increase access to capital for economic development through small businesses. Funding has not been historically available for business transactions, but in a floor dialogue on the bill, Congress directed the Treasury Department to include transitions to employee ownership in the program. Under the program, state programs can (but are not required) to use the money both for direct loan support and technical assistance for employee ownership conversions.
2022: The CHIPS Act of 2022
The CHIPS Act of 2022 created regional technology and innovation hubs. Included in a long list of eligible recipients for training grants from the program are organizations that promote employee ownership. The bill also directs Manufacturing Excellence Programs under the National Institute of Standards and Technology to include employee ownership in their list of potential outreach efforts.
2022: The WORK Act
The Consolidated Appropriations Act of 2023, an omnibus spending bill enacted in December 2022, had three provisions on ESOPs, all under the part of the bill called the WORK Act within the SECURE 2.0 Act of 2022.
The bill created a federal program to fund state employee ownership outreach and training programs. Under the law, the Department of Labor (DOL) would establish an Employee Ownership and Participation Initiative to promote employee ownership and employee participation in business decision-making. The program would be funded at $4 million in fiscal year 2024, gradually increasing to $16 million by fiscal year 2028. The DOL set up the initiative in 2023. Funding for the grant program is dependent upon a yearly appropriation being made by Congress. As of 2025, no funding has been approved.
The funds can go to existing state programs or to create new ones. States can contract out the work to qualified organizations or create the program in-house. If a state does not apply, nonprofits can apply in the following year. Funds can be used for training, technical assistance, and working with local organizations to help business owners understand how employee ownership through ESOPs, worker cooperatives, or employee ownership trusts can be used for business succession.
The bill also required that the Department of Labor develop “acceptable standards and procedures to establish good faith fair market value for shares of a business to be acquired by an employee stock ownership plan.” ESOP advocates have long sought this clearer guidance on ESOP valuations, arguing that the lack of standards has led to unwarranted ESOP litigation.
Finally, the bill provides that starting in 2028, sellers to an ESOP in an S corporation can defer 10% of the tax on the gain by reinvesting in stocks and bonds of US operating companies. The tax deferral is based on the 100% tax deferral available for sales to an ESOP in C corporations. It was limited to 10% because of budget concerns.
Pending Legislation, 118th Congress
The Retire Through Employee Ownership Act of 2025
The Retire Through Ownership Act (S. 2403) was introduced by Representative Bill Marshall (R-KS) and Tim Kaine (D-VA) to address the risks of ESOP valuation by creating a “safe harbor” for ESOP trustees. It would allow ESOP trustees to rely on independent appraisals by qualified ESOP appraisal firms using guidance under IRS Revenue Ruling 59-60. First issued in 1959 for valuing small business stock for gift and estate tax purposes, it outlines the basic valuation principles that ESOP valuations typically use, such as weighting earnings, assets, and comparable company approaches; using discounted or capitalized earnings to project enterprise value; and calculating discount rates based on the weighted average cost of capital. ERISA was not enacted until 1974, so Revenue Ruling 59-60 did not apply specifically to ESOPs. In late 2024, the DOL issued its own proposed valuation guidelines, which would have been much stricter, but the new administration recalled them. The bill would allow the Secretary of Labor to issue regulatory guidance in interpreting the valuation provisions in the bill. In July 2025, the Senate Health, Education, Labor and Pensions (HELP) committee voted to advance the bill to full Senate consideration.
The Employee Ownership Representation Act of 2025
The Employee Ownership Representation Act of 2025 (S. 1728), introduced by HELP committee chair Senator Bill Cassidy, M.D. (R-LA) and Maggie Hassan (D-NH), would add two new ESOP company board members to the Advisory Council on Employee Welfare and Pension Benefit Plans, also known as the ERISA Advisory Council. The HELP committee also adopted two amendments to the bill. One amendment (PDF) incorporates the Advocate for Employee Ownership Act (S. 2474), sponsored by Senators Maggie Hassan (D-NH) and Steve Daines (R-MT), which would establish an Advocate for Employee Ownership with the Employee Ownership Initiative at the DOL. The initiative was mandated by the WORK Act, part of the SECURE 2.0 Act of 2022 (see above). The Advocate would help identify opportunities and issues for ESOPs within the federal government to promote employee ownership. A second amendment (PDF), introduced by Senator Bernie Sanders, directs the Secretary of Labor to create an Office of Employee Ownership in the Department of Labor, to be located outside of the EBSA. The DOL currently has a Division of Employee Ownership located within EBSA as part of the Employee Ownership Initiative. This bill would relocate this function outside EBSA and add a bipartisan seven-person advisory council composed of four employee-owners, one leader from an employee-owned company, one person from an employee ownership organization, and one ESOP service provider.
The Employee Ownership Financing Act
The Employee Ownership Financing Act, sponsored by Senator Bernie Sanders, is a somewhat revised version of legislation he and other Democrats have proposed in prior Congresses. Part of the bill concerned the Office of Employee Ownership (OEO) and was added to the Employee Ownership Representation Act, which was added to the Employee Ownership Representation Act referenced above.
The remaining part of the bill was proposed as an amendment but did not pass. It would allocate $500 million for loans to ESOPs or worker-owned cooperatives that are, or will become after using the loan, at least 51% employee-owned. It also provides employees the right of first refusal where an employer covered by the WARN Act is required to provide at least a 60-day notice of mass layoffs at a single work site.
The Employee Ownership Fairness Act
The Employee Ownership Fairness Act of 2025, also introduced by Senator Cassidy in July, was removed from HELP committee consideration. The bill would exclude ESOP contributions from the limits currently applied to defined contribution benefit plans. C corporations with ESOPs can count contributions to a leveraged ESOP and to a 401(k) plan (both from the company and employees) separately for the annual 25%-of-pay contribution limit. S corporations do not qualify. The law would allow any company to count the contributions separately. This is very rarely an issue in ESOP companies, and would arise primarily where the company makes large annual contributions to the ESOP and participants want to make large annual deferrals into the 401(k) plan.
Promotion and Expansion of Employee Ownership Act Introduced in Senate
The Promotion and Expansion of Employee Ownership Act 2025 (PDF) was introduced by Senators Steve Daines (R-MT) and Maggie Hassan (D-NH), along with a bipartisan group of cosponsors. This is a companion bill to H.R. 3105, introduced by Representatives Mike Kelly (R-PA, chair of the House Ways and Means Committee) and Jimmy Panetta (D-CA). The bill has four components:
- It provides that sellers to an ESOP that owns at least 30% of the stock in an S corporation can defer tax on the gain by reinvesting in stocks and bonds of US operating companies. Currently, sales to S corporation ESOPs that occur after 2027 will qualify for a 10% deferral of gains.
- It requires the Secretary of the Treasury to establish an S Corporation Employee Ownership Assistance Office. The office would focus on education and outreach.
- It provides that at companies that qualified for contracting or other government preference programs for women, minority, or disabled veteran-owned businesses before more than 49% of the stock was acquired by an ESOP, after this threshold is passed, each ESOP participant is treated as directly owning their proportionate share of ESOP-held stock. This means that the company will still qualify if a majority of its stock is allocated to individuals meeting the criteria.
- It establishes an Advocate for Employee Ownership within the Employee Ownership Initiative at the Department of Labor. There is currently a Division of Employee Ownership in the DOL, but its function is more informational. The Advocate would also have an informational function, but would also work with other federal agencies to identify legislative and regulatory opportunities for expanding employee ownership. The law would require an annual report to be filed with the Senate HELP Committee on its activities. Language very similar to this proposal was added to the Employee Ownership Representation Act, discussed above.
SHARE Plan
The new Share Holder Allocation for Rewards to Employees Plan Act (PDF), or the SHARE Plan Act, is sponsored by Representatives Tom Suozzi (D-NY) and Mike Kelly (R-PA). The bill would provide a tax reduction for large companies to share ownership broadly with employees.
The legislation provides a 3% tax rate reduction for US-domiciled companies that establish and maintain a SHARE plan, which is defined as a corporate program that grants common stock to employees periodically at no cost. A SHARE plan must include in each stock grant the lowest-compensated 80% of US-based employees who do not receive $250,000 or more in annual cash compensation (this dollar amount would be annually adjusted for inflation). A company qualifies for the 3% reduction in any year in which it has an average of 500 or more full-time US-based employees and either distributes at least 1% of its stock in that year or has cumulatively distributed at least 5%. Performance-based equity compensation is excluded from qualifying. Stock grants must be made in equal amounts (allowing for adjustments for employees not employed through the entire calendar year), except that employees may be grouped by tenure, with separate grant amounts going to each group. Grants may be subject to vesting, but all grants must vest within five years and must vest upon retirement, termination without cause, or a change in control. The stock must be able to be freely sold or transferred once vested.
If the company is private, it must conduct a yearly valuation of its shares and provide employees with adequate opportunities to sell their shares at fair market value.
In addition to the tax rate reduction, the company is allowed a tax deduction for the fair market value of stock distributed in the SHARE plan during the taxable year. For employees, stock received under a SHARE plan is excluded from gross income.
American Ownership and Resilience Act
The American Ownership and Resilience Act, introduced by Senators Chris Van Hollen (D-MD) (press release) and Jerry Moran (R-KS), and US Representatives Blake Moore (R-UT) and Lori Trahan (D-MA) (Senate and House bill PDFs), is a relaunch of the Employee Equity Investment Act of 2023 (EEIA) introduced in the last Congress.
The bill would create an investment facility within the Commerce Department to form a public-private partnership that works like existing Small Business Investment Company (SBIC) loans, but focusing on employee ownership. The program would provide federal backing for Employee Equity Investment Companies (EEICs). EEICs would raise their own funds but would receive federal loan guarantees to provide debt at more reasonable costs and/or equity infusions into transactions in which an ESOP or eligible worker coop ends up with a majority interest in the company (or where the ESOP already owns that much and the company seeks growth capital). The debt would normally be subordinate to other lenders. EEICs would pay fees into the program and, like the regular SBIC program, would operate at a zero-subsidy cost to the federal government. EEICs would be funded by a similar mechanism as existing SBICs, where the SBA issues unsecured debt instruments called debentures based on loans the SBICs make.