Key Benefits from Congressional Action on Retirement Savings
According to the Federal Reserve, 40 percent of American families do not have enough emergency savings to pay for an unexpected expense, such as a flat tire or a burst pipe, that is greater than $400. Legislators are working to enact and pass legislation that will help mitigate this widespread issue and change the course of the long-term implications that retirement poverty could have on every aspect of American life.
The Legislative branch of American government along with the Department of Labor and the Department of Education are in consensus that an Employee Stock Ownership Plan (ESOP) can be a key tool in mitigating the worst aspects of this challenge. Consequently, the legislation enacted over the last year incentivizes business owners to create a mutually beneficial environment for both their employees and the company’s tax efficiencies.
About the Legislation
At the end of March, the U.S. House of Representatives passed The Securing a Strong Retirement Act of 2022 (H.R. 2954), also known as the “Secure Act 2.0,” which would expand and encourage retirement savings by an overwhelming vote of 414-5. The bipartisan support that the Secure Act 2.0 has received in the House is anticipated to continue in the Senate as well.
5 Reasons Why This Matters for Business Owners Considering ESOPs
- Among other provisions, the bill would allow shareholders of an S Corporation, which is sold to an ESOP after December 31, 2027, to qualify for tax efficiencies under U.S. Code § 1042. This benefit would apply to 10% of the capital gain realized. U.S. Code § 1042, like its cousin U.S. Code §1031, allows for the deferral of capital gain tax upon sale. Both U.S. Code § 1042 and 1031 require the “rollover” of the gain into a new asset.
- Although less than the 100% deferral option currently available to shareholders through the sale of a C Corporation to an ESOP, this change may alleviate some of the capital gains tax cost of selling to an ESOP for companies that do not convert to a C Corporation prior to the ESOP sale.
- If the S Corporation shareholder receives their sale proceeds over a number of years, they may find it easier to satisfy the requirements of U.S. Code § 1042 on this portion of the gain.
- If enacted, this provision may pave the way for benefits to become more generous over time or be accelerated in future legislation. Future bills could increase the exclusion percentage from 10% to 20%, then 30%, and beyond while allowing the budgetary impact to be spread out between bills.
- In addition to the bipartisan Secure 2.0 Act, the Protecting America’s Retirement Security Act (H.R. 7310) was passed along party lines by the U.S. House Education and Labor Committee. The bill contains pro-ESOP provisions, including the creation of a program to provide local grants for employee ownership education and grants.
3 Ways Business Owners Can Leverage This Information
- Start now with the end in mind. Discuss how to improve financial reporting, leadership and operational succession planning, and corporate governance with your leadership team and advisors.
- Have a comprehensive ESOP Feasibility Analysis (FA) completed for your business. This assessment provides a snapshot of the possibilities for shareholders, succession management, loyal employees, and your community through an ESOP transaction. Lazear Capital prioritizes and completes a thorough Feasibility Analysis for each of our clients considering ESOPs as a succession planning tool.
- Call your local and state legislators to show your support for legislation that protects retirement security.
As always, our team is available to help illuminate how these insights might benefit your succession planning efforts. If you or one of your clients are interested in pursuing this opportunity, please contact us to schedule a discussion as soon as possible.