ESOP Support Remains Strong Despite Midterm Election Results

Posted: Updated:

On the surface, November's midterm elections appear to have had a negative impact on ESOPs (Employ Stock Ownership Plans), because ESOP supporters in both arms of Congress were either defeated or retired. However, many supporters still remain and the Indiana environment continues to be strong as evidenced by Gov. Holcomb’s recent declaration of October as “Employee Ownership Month”. This political change was one of the major focuses featured at the recent 2018 ESOP Association’s Annual Conference in Las Vegas.

Why is this important? Any political shift, including the 2017 leadership changes at the Department of Labor (DOL), creates uncertainly relating to how ESOPs will be treated. Even though the DOL supports ESOPs, all newly-elected leadership needs to be educated on the powers of employee ownership.

Employee-owned companies are consistently more profitable than their peer companies and 7.3 times less likely to lay off employees than conventionally-owned companies.  Fewer layoffs save the government money in unemployment compensation – nearly $2 billion in 2014 alone.  In addition, ESOP companies often contribute over 10 percent of employee compensation to their ESOP which is far above the national average for contributions to 401(k) plans of non-employee owned companies.

While the DOL and government officials acknowledge these facts, they continue to concentrate on one facet of ESOPs - their initial set-up. Protection of the individual employee is key to the DOL.  They want to ensure that the initial value that the ESOP plan pays for the stock of the company is not in excess of its fair market value. In simple terms, making sure the employees are protected from overpaying and the previous owners are not receiving too much for their stock.

Accurately valuing an ESOP can be tricky. ESOPs cannot pay more than the fair market value for the stock of the company, per the DOL and IRS guidelines. This may sound like an easy step to overcome, but it is the DOL’s number one concern. First, the company is valued by an experienced valuation expert. Then, after the transaction is completed, the debt due to the previous stockholders is placed on the balance sheet causing the value of the company to decline. Consequently, the DOL then oftentimes takes the position that the company was not properly valued in the first place since its value declined immediately after the ESOP was initiated, causing the new shareholder employees to overpay for the company.

One of the keys to a successful employee-owned company lies at the very beginning of the process.  Make sure the company is valued properly at the start of the plan. During the past several years, the DOL consistently contests the cost of the stock that the employees are paying to the previous owners. It is critical that an ESOP administrator secure a highly experienced team of professionals who know how ESOPs work, which goes beyond simply conducting a valuation.  It should include a well-documented feasibility study, strong projections with well thought-out assumptions and a detailed process that includes a third party trustee.

Helping our new political leadership understand this complex issue is critical to gaining their support and assistance for ESOPs well into the future.  The ESOP Association will be actively educating our federal legislators.

 

  • Perspectives

    • "Wood" You Consider Investing in Timber?

      Looking for an untraditional way to diversify your traditional stock and fixed-income portfolio? If so, try thinking outside the typical realm of investable assets. Don’t know where to start? How about going against the “grain” and investing in timber? Why Trees? Investing in timber can yield a number of benefits. The main draw of having timber in your portfolio is its low, long-term correlation to traditional investments such as stocks and bonds. Low correlation...

    More

Subscribe

Name:
Company Name:
Email:
Confirm Email:
HTML
INside Edge
Morning Briefing
BigWigs & New Gigs
Life Sciences Indiana
Indiana Connections
INPower
Subscribe
Unsubscribe

Events



  • Most Popular Stories

    • 1SI executives Matt Hall and Wendy Dant Chesser talked about the project on Inside INdiana Business.

      Momentum Building at 'Hot Spot' River Ridge

      As economic development officials in southeast Indiana welcomed news last week of Louisville-based PharmaCord's plans to invest $52 million and add up to 850 jobs at the River Ridge Commerce Center, they were quick to add there is more development on the horizon. River Ridge is a sprawling, 6,000 acre park located between Jeffersonville and Charlestown that was once home to the massive Indiana Army Ammunition plant and thousands of jobs. Today more than 50 companies call River...

    • (photo courtesy of Governor Eric Holcomb's office)

      Governor Meets with Ag Leaders on Delayed Planting

      Governor Eric Holcomb recently met with leaders from the state's agriculture sector regarding the impact of unusual weather conditions on farms and other ag businesses. The USDA says 84 percent of Indiana's corn crop and 64 percent of soybeans have been planted. Typically, both crops are at 100 percent planted by this time of the year.

    • (photo courtesy of Taylor University)

      Taylor University President to Resign

      The president of Taylor University is stepping down. The university's board of trustees says Paul Lowell Haines has resigned from the position and will leave the Upland campus August 15. A specific reason for Haines' resignation was not given, however the Board Chair Paige Cunningham noted the move was "neither solicited nor encouraged" by the board. Haines graduated from Taylor in 1975. He later held various positions at the university including vice president for...

    • "Wood" You Consider Investing in Timber?

      Looking for an untraditional way to diversify your traditional stock and fixed-income portfolio? If so, try thinking outside the typical realm of investable assets. Don’t know where to start? How about going against the “grain” and investing in timber? Why Trees? Investing in timber can yield a number of benefits. The main draw of having timber in your portfolio is its low, long-term correlation to traditional investments such as stocks and bonds. Low correlation...

    • Colts Name Overton As Producer

      The Indianapolis Colts have named Larra Overton as the team's new producer and on-air talent. Overton currently is a sports reporter and anchor for Fox59 WXIN/CBS4 WTTV. She will serve as producer for Colts Productions and will serve as the television sideline reporter for preseason broadcasts and radio sideline reporter for regular season games. Overton holds two degrees from Indiana University.