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Mini-cast 213: The SECURE and WORK Acts Move EO Forward

The SECURE Act & WORK Act Move EO to a New Level

Host Bret Keisling gives a brief overview of important new federal legislation that should move employee ownership to new levels.

Part of the Consolidated Appropriations Act, passed in December 2022, the SECURE Act and WORK Act call for the Department of Labor to provide guidance on ESOP valuations and determining fair market value, allow for deferred capital gains tax on S-Corp ESOP transactions, provide funding for state and local governments and non-profit entities to encourage EO, as well as implement technical changes to mandatory disbursements and to self-correcting and reporting inadvertent errors in ESOP administration.

For more detail, we recommend the blog post "Major Wins for Employee Ownership in New Spending Bill" written by Corey Rosen, which you can read in full on the National Center for Employee Ownership's (NCEO) website.


Mini-cast 213 Transcript

[00:00:00] Bret Keisling: Welcome to the EsOp Mini-cast. Thank you so much for listening. My name is Bret Keisling and as it says on my business cards, I'm a passionate advocate for employee ownership.

[00:00:18] Employee ownership has seen significant legislative progress in the United States, both at the statewide level and nationally. California, among other states, passed and signed into law legislation strongly supporting employee ownership. And we've seen legislation introduced in Pennsylvania, Tennessee, and Vermont to name just a few.

[00:00:37] Perhaps the most significant movement has come nationally with the passage of the Consolidated Appropriations Act of 2023, which included a number of important changes and improvements to employee ownership.

[00:00:50] Relevant parts of the Consolidated Appropriations Act include the SECURE 2.0 Act of 2022, which modifies and enhances the SECURE Act that was passed in 2019. "SECURE" stands for Setting Every Community Up for Retirement Enhancement which clearly speaks to employee ownership.

[00:01:09] The most critical changes come with the passage of the WORK Act, which stands for Worker Ownership, Readiness, and Knowledge, which has been described as the most important pro-employee-ownership legislation since S corporations were allowed to become ESOPs in the 1990s. We're going to include a link in our show notes to a blog post written by NCEO founder Corey Rosen which covers the legislation in a lot more detail.

[00:01:36] Those of us who work to promote employee ownership recognize that we're playing long ball, that the changes and improvements we seek will not happen overnight. This point was driven home when I saw that the WORK Act is actually based on proposed legislation that Corey Rosen drafted way back in 1987 for Senator Jim Sasser of Tennessee.

[00:01:57] Among other things, the WORK Act calls for the Department of Labor to establish standards on valuation and good faith fair market value for the businesses being sold to an ESOP. In the seven years I spent as an ESOP trustee, it was always daunting to know that the DOL could look at a transaction and tell the parties involved and their advisors that they did it wrong. But it was always after the fact. If the DOL follows through and comes up with the guidance, it should remove a lot of uncertainty in the ESOP transactions.

[00:02:27] That said, I do have a sense of be careful what you wish for. Because bad regulations or guidance could result in ESOP transactions becoming less attractive and/or less competitive compared to non-ESOP transactions.

[00:02:42] Another important change will allow deferred capital gains taxes on up to 10% of the gain for S-Corps. So, for example, if the selling shareholder realizes a capital gain of $10 million, they'll be able to defer taxes on $1 million. And as Corey Rosen pointed out in his blog, although the 10% for S-Corps doesn't approach the deferment of capital gains when it's a C Corp, this initial legislation will hopefully allow for greater percentage of deferment to be acted in the future.

[00:03:11] Another really important aspect that I think will have a dramatic effect is the WORK Act requires the DOL to create an "Employee Ownership Initiative" that will provide funding and resources to promote employee ownership in the states, via state and local governments and even nonprofit entities. $4 million worth of funding is allocated beginning in fiscal year 2025 and it eventually increases to 16 million for fiscal year 2029. But obviously the hope is the Congress will see results and continue, if not expand, the program after that.

[00:03:43] There are a number of other modifications to the bill, including increasing the threshold for mandatory cash outs beginning in 2024 and new flexibility for companies that inadvertently overpay an employee distribution.

[00:03:56] Another potentially very important aspect is the expansion of the Employee Plans Compliance Resolution System, which allows ESOPs that self-discover [to] report and fix an inadvertent compliance issue provided the trust acted before the IRS identifies the failure.

[00:04:12] There's so many more aspects to the bill, many of which address retirement plans generally such as 401ks. Although not directly related to employee ownership specifically, it's important because many employee-owned companies provide 401ks or other retirement benefits, so certainly there will be an effect on ESOPs and worker co-ops.

[00:04:31] I've merely scratched the surface with the SECURE Act and the WORK Act and again, I recommend Corey Rosen's blog post, which you can find in our show notes for a more complete look at the legislation.

[00:04:42] With that we'll wrap up today's episode of the Mini-cast. Thank you so much for listening. This is Bret Keisling. Be well.


[00:04:49] Bitsy McCann: We'd love to hear from you. You can find us on Facebook at EO Podcast Network and on Twitter @ESOPPodcast. This podcast has been produced by Bret Keisling for the EO Podcast Network, original music composed by Max Keisling, branding and marketing by BitsyPlus Design, and I'm Bitsy McCann.

Standard Disclaimer: The views expressed herein are my own and don't represent those of my own firms or the organizations to which I belong. Nothing in the podcast should be construed as guidance or advice of any kind in any field and the fact that I mentioned an organizational website or an advocate or a company on a podcast does not reflect an endorsement, but if you've heard your name or your group's name mentioned on this podcast, I'd love to have you come on and talk about it yourself.

A note on the transcript: This transcript was produced by Descript, an automated transcription service. While it has been reviewed by The EsOp Podcast, we cannot guarantee the accuracy of the transcription. Please refer to the original audio when citing sources.

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