Washington Affects Employee Ownership

by Anthony Mathews


Officially, our institute has no political positions so, for the most part, we do not discuss political issues or opinions here. We are, however, absolutely dedicated to the promotion of broad-based employee ownership, so when a political action might have a significant effect on that (in either direction) we will take the time to let our readers know about it so you can decide for yourselves how you feel about it.

In this year of seemingly frozen political process, it is unlikely that anything will pass (except the motion to adjourn, of course), there are, nevertheless, several measures that could greatly enhance the accessibility of employee ownership (through ESOPs, especially) and which are enjoying some very rare bi-partisan support.

The first of the bills, introduced mid-2011 in the House of Representatives, is House Bill H.R. 1244. This bill has a total of 46 co-sponsors including congresspeople from both parties and, among other matters, its principal feature is that it would extend to selling shareholders in S-Corporations the same ability to rollover and defer tax on the sale that has been enjoyed by shareholders of C-corporations for the last 25 years or so. In September, a companion bill was introduced in the Senate, S. 1512, which includes provisions identical to those in H. R. 1244 with regard to the rollover and deferral of tax upon sale to an ESOP of an S-corporation. The Senate bill is co-sponsored by five members: two democrats, two republicans and one independent. It is gratifying that our elected leaders seem to be able to agree on one thing anyway ? employee ownership is a good thing that ought to be supported and even expanded.

Other provisions of this legislation include: creating an office of the Treasury to assist with questions taxpayers have about S-Corporations and ESOPs; and expanding small business favorable treatment of employee-owned companies such that any favorable status they might have had would be preserved following transfer of ownership to an ESOP provided the demographics of the employee group was not significantly altered after the ESOP took over.

These provisions would, most insiders believe, greatly enhance the attractiveness of ESOPs as the exit vehicle of choice for small business entrepreneurs (who tend to use the S-corporation structure) and family business owners who seek liquidity as their retirement approaches.

One other important legislative development that is currently percolating in the Senate is S. 1232. You may recall that the Department of Labor (DOL) proposed a sweeping expansion of the ERISA definition of "fiduciary" such that it would incorporate many consultants and advisors to ESOPs including the ESOP's appraisers. The negative reaction to this proposal caused the DOL to withdraw the proposal, but their stated intent to reintroduce it brought a group of senators, again including important members from both sides of the aisle, to propose a statutory amendment ERISA to specifically prevent the broadening of the definition with regard to appraisers.

It should be noted that no one is in favor of shoddy oversight of ESOPs nor fiduciary violations. As we have noted many times in the past, the ESOP community is largely self-policed and is always ready to assist in the formation of rules that will enhance the effectiveness of our primary purpose ? to create wealth opportunities for people at all levels of our society who would not otherwise have them. But, very strong fiduciary rules already exist that would prevent everything this new rule proposes to cure, and the addition of the proposed level of involvement will only serve to increase the cost and complexity of these great plans with no benefit in terms of protection of our participants.

Of course, the over under is zero percent and zero percent that anything meaningful will be passing either house this year, but eventually, that will have to change. If you are inclined to do so, a contact with your senators or congresspersons would be very well placed as these bills come up for review in the next session. If you want help on how to approach these folks, we highly recommend that you contact The ESOP Association at www.esopassociation.org who will gladly provide you with materials and approaches for contacting your representatives.

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