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Senate of Pennsylvania
Session of 2017 - 2018 Regular Session

MEMORANDUM

Posted:	April 26, 2017 11:22 AM
From:	Senator Stewart J. Greenleaf
To:	All Senate members
Subject:	Employee Stock Ownership Plans (ESOPs)

I plan to introduce legislation amending the Tax Reform Code of 1971 by applying federal Internal Revenue Code (IRC) Section 1042 (Sales of stock to employee stock ownership plans or certain cooperatives) at the state level. IRC Section 1042 provides an owner of a C corporation an opportunity to defer 100% of federal capital gains tax on the sale (transaction) of some or all of their business to an Employee Stock Ownership Plan (ESOP). The deferred amount must be placed in an approved investment instrument. When and if the owner redeems those funds (it can be passed to his/her decedents in a trust), the owner will pay capital gains. As of today, Pennsylvania is one of only three states that has yet to adopt the federal “1042 Election”. Implementing this federal provision at the state level not only brings us into alignment with the majority of other states, it also creates an incentive for owners of C corporations to create an ESOP (rather than selling to those who may move or strip the business), and provides real shares of the business to the employees at no cost to them. When the employees leave the business, at retirement age, or as per the Plan document, they will pay ordinary income tax on the value of their shares, but they pay nothing till then. This creates real retirement for citizens, reduces the burden on government to care for them in their later years, keeps businesses in Pennsylvania, grows jobs, and stimulates the economy. In the Employee Retirement Income Security Act of 1974, Congress codified a technique of corporate finance which utilizes employee stock ownership, officially named an Employee Stock Ownership Plan (ESOP). ESOPs serve the dual purpose of providing retirement savings and stock ownership for employees as well as being a financing method for businesses. According to the National Center for Employee Ownership (NCEO), there are about 7,000 ESOP-owned companies covering 14 million employees. It is estimated that Pennsylvania has 500 companies with ESOPs or similar trust-based plans covering about 900,000 participants. Research shows that employee ownership increases employment, productivity, wages and sales. Employee ownership keeps businesses and jobs in state. According to NCEO, ESOP-owned companies are 25% more likely to stay in business and employee-owners were 4 times less likely to be laid off during the recent recession. In addition, ESOPs have 25% higher job growth than comparable companies without such a plan over a 10 year period. Further, ESOPs have a number of tax benefits including making company contributions and dividend payments tax-deductible. ESOPs could provide an effective tool for companies going through ownership transition by preserving their companies and jobs through employee ownership rather than closing or selling them to out of state, or out of country buyers. Increased use of employee ownership plans can substantially increase the income and financial security of the citizens of Pennsylvania. Employee ownership helps to keep jobs in the United States, increases quality, and provides employees with sufficient retirement plans, reducing reliance on Social Security. This is a companion bill to Representative Daryl Metcalfe’s proposal.

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