“With the ‘silver tsunami’ of Baby Boomer business owners set to retire…[the ESOP Association is] committed and focused on continuing to increase education and awareness about ESOPs for both companies and the professionals they rely on for advice and counsel.”
Paul Pflieger, Director of Communications at The ESOP Association (TEA)
Employee ownership is a very attractive form of employment to some workers. It consists of employees acquiring shares in the company through an option plan called an employee stock ownership plan (ESOP). While selective plans are only made available to senior executives, all-employee plans offer participation to all workers.
The National Center for Employee Ownership (NCEO) describes employee stock ownership plans as trust funds for employees. Companies contribute cash to buy company stock, contribute shares directly to the plan, or have the plan borrow money to buy shares. If the plan borrows money, the company makes contributions to the plan to enable it to repay the loan. Contributions to the plan are tax-deductible, and employees pay no tax on the contributions until they receive the stock when they leave or retire. They can then either sell it on the market or back to the company.
If an ESOP owns 30 percent or more of company stock and the company is a C corporation, owners of a private firm selling to an ESOP can defer taxation on their gains by reinvesting in securities of other companies. S corporations can have ESOPs as well, and earnings attributable to the ESOP’s ownership share in S corporations are not taxable.
In other plans, employers partially match employee 401(k) contributions with contributions of employer stock. Employees can also choose to invest in employer stock whereby companies give employees the opportunity to purchase shares at a fixed price for a predetermined number of years.
“ESOPs are retirement plans, governed by some of the same laws and regulations as 401(k) plans,” according to The ESOP Association (TEA). “ESOPs, though, are fundamentally different from 401(k)s, offering far more advantages to businesses, owners, employees, and communities.”
There are cascading benefits of ESOPs for employees, employers, and surrounding communities, according to the TEA. These include the following:
ESOPs result in motivated and engaged employees who are driven to work hard because they are rewarded if the stock rises and they lose out when the stock falls. This type of incentive encourages employees to problem-solve and work on efficiencies in order to push the company’s success and profits forward.
Typically, ESOPs require no out-of-pocket employee contributions. For many, saving for retirement can be a challenge and ESOPs may be the only way to do it. Companies with ESOPs tend to report higher worker wages and greater savings than at non-ESOP companies.
TEA reports the following statistics from its members:
NCEO reports the following:
Paul Pflieger is the Director of Communications at The ESOP Association (TEA) where he has worked for three years, and in his current role as head of the communications department for three months.
Pflieger’s background is in public relations, digital advertising, and grassroots engagement. He graduated from American University with a bachelor’s in strategic communication and marketing. A Washington DC native, Pflieger currently lives in Arlington, Virginia.
TEA and its affiliated 501c3, the Employee Ownership Foundation, have worked to educate companies and individuals about the benefits of ESOPs.
“Employee Ownership and specifically Employee Stock Ownership Plans have been growing in popularity over the last few years,” says Pflieger. “The biggest obstacle to new ESOP formation is awareness both at the company level and more importantly within the community of professional advisors they rely on. For the most part, there is a general awareness of ESOPs in the accounting and legal professions, but the depth of knowledge is fairly shallow.”
“With the ‘silver tsunami’ of Baby Boomer business owners set to retire…(we) are committed and focused on continuing to increase education and awareness about ESOPs for both companies and the professionals they rely on for advice and counsel,” adds Pflieger.
Sara Andrews, CPA is the controller for Schoeneman Bros. Co. in Sioux Falls, South Dakota and shared the incredible story of the generosity of Al Schoeneman, owner of her company.
Al is the fourth-generation owner of this company, which began back in 1888, with Al’s great grandfather and his brothers. Over the years the company has been passed down within the Schoeneman family. Al became the sole owner when he inherited ownership of the company from his father and uncle (both have passed away). Al Schoeneman himself was an only child and has no children of his own, so he was looking for a way to give the company, to the ‘family’ he has, (which are) the employees at Schoenemans, many of whom have been with the company for more than 25 years.
Schoeneman created an ESOP on January 1, 2016, and has annually contributed stock to it. In 2017, Pat Costello joined the company and purchased a portion of shares from Schoeneman.
“Al, being the generous and philanthropic man that he is, has essentially donated his shares to the ESOP, receiving nothing in return for those shares issued to the ESOP,” continues Andrews. “His goal in 2015 was to somehow give the company to the employees of Schoenemans, particularly those who have been with him for a long time. And now, five years into the ESOP, the 56 employees own…48 percent of the company—an ESOP which is not leveraged, has no loan payments, and is valued at over $2.6 million. Those employees have not had to contribute a single penny for that value.”
For companies exploring this type of company ownership, Pflieger first recommends they join the ESOP Association as an affiliate member. This gives them full access to all the amazing resources TEA offers and to the members themselves.
“Our members are the best advocates for employee ownership because they are experiencing all the amazing cultural shifts that come with giving employees a stake in the success of their business,” says Pflieger. “I would also recommend they visit us at one of our chapter events. We have 18 chapters across the country with events aimed toward those with an established ESOP and those considering employee ownership.”
Additionally, Employee Ownership Month is celebrated in October and the ESOP Association offers a wealth of resources for current and aspiring employee-owned companies.
For more information, check out the following resources: