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The Consolidated Appropriations Act of 2023 is an omnibus spending bill that was signed into law on December 29, 2022. This spending bill contains a number of provisions expected to have a positive impact on employee stock ownership plans (ESOPs). Contained within this bill are the Setting Every Community Up for Retirement Enhancement (SECURE) 2.0 Act of 2022 and the Worker Ownership, Readiness, and Knowledge (WORK) Act.

The WORK Act

The WORK Act will provide funding to the U.S. Department of Labor (DOL) to enable the establishment of an employee ownership initiative for the promotion of employee ownership through the making of state-level grants. The program will receive $4 million of funding in fiscal year 2025 and will increase to $16 million by 2029.

Program funds may be used for the following purposes:

  • “(A) providing education and outreach to inform employees and employers about the possibilities and benefits of employee ownership and business ownership succession planning, including providing information about financial education, employee teams, open-book management, and other tools that enable employees to share ideas and information about how their businesses can succeed;
  • “(B) providing technical assistance to assist employee efforts to become business owners, to enable employers and employees to explore and assess the feasibility of transferring full or partial ownership to employees, and to encourage employees and employers to start new employee-owned businesses;
  • "(C) training employees and employers with respect to methods of employee participation in open-book management, work teams, committees, and other approaches for seeking greater employee input; and
  • “(D) training other entities to apply for funding under this subsection, to establish new programs, and to carry out program activities.”

In addition to funding these education and training programs, the WORK Act also requires the DOL to issue “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.” The lack of regulation in ESOP valuation and the increased number of ESOP audits and litigation have long been a concern of the ESOP community.

SECURE 2.0

Section 1042 of the Internal Revenue Code currently provides that shareholders of privately held C corporations who sell to an ESOP that owns 30% or more of the company stock after the sale have the ability to defer capital gains tax on the transaction if certain reinvestment criteria are met. SECURE 2.0 extends this benefit to owners of S corps but in a more limited capacity. Effective for sales after December 31, 2027, S corp shareholders can defer 10% of their gains by reinvesting in qualified replacement property. Allowing a 10% deferral instead of a 100% deferral was intended to reduce the cost of the bill. However, this small win represents progress on an issue that ESOP advocates have been working toward for several years.

If you have questions or need assistance, please reach out to a professional at FORVIS or submit the Contact Us form below.

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