NCEO December 2022 Newsletter

ISSUE HIGHLIGHTS

● Succession Planning is for Everyone. See Taking Stock on page 2.

● Best Practices: ESOP errors and how to avoid them. See page 4.

● Valuation firm must pay insurer; new rules issued under DOD pilot ESOP contracting program. See Cases & Rulings on page 5.

● What is the proper valuation date for distributions? Is there a minimum annual contribution you have to make to an ESOP? See the Employee Ownership Q&A on page 7.

● Employees vote on ESOP-owned jewelry company staying open on Sunday; more ESOP companies announce acquisitions. See Companies on page 8.

● Questions to Ask Your Employee Owners: A great idea from Hypertherm about ways to engage employees and customers. See the Owners’ Page on page 9.

EMPLOYEE OWNERSHIP REPORT

OWNERSHIP NEWS

New York Comptroller General Report Encourages State Outreach for Employee Ownership

Message from the Comptroller

October 2022

In a new report from the Comptroller of the State of New York, Employee Ownership of Businesses in New York State, Thomas DiNapoli writes that “research has shown that employee ownership can positively impact employee compensation and retirement assets making it an effective tool to create lasting wealth and improving employee satisfaction.

Federal, state and local policymakers have advanced many programs to bolster support for workers to increase their earnings or accumulate sufficient assets to retire with dignity. Research has shown that employee ownership can positively impact employee compensation and retirement assets making it an effective tool to create lasting wealth and improving employee satisfaction. Facilitating expansion of employee ownership models in which workers have an ownership stake in the companies they work for is one way to help achieve this goal. In addition to the benefits afforded to employees, employers are provided a pathway to convert or sell their business to those employees and managers who helped build the company, providing opportunities for workers and the community.

Thomas DiNapoli

“Facilitating expansion of employee ownership models in which workers have an ownership stake in the companies they work for is one way to help achieve this goal… State policymakers could consider additional opportunities to educate businesses, workers and labor organizations on the advantages and risks associated with different forms of employee ownership and, if appropriate, leverage resources to assist New York companies pursuing these business models.” Specifically, the report states that: “New York could encourage employee ownership more broadly by developing the following strategies:

● Expand networks and partnerships of business owners, employees, labor unions, and economic developers to provide technical assistance to and educate potential employee-owners on the benefits and drawbacks of EO;

The most common forms of employee ownership differ in the ways they impact the individual worker, but overall they accomplish similar goals. One of the most popular forms of employee ownership is Employee Stock Ownership Plans (ESOPs) which combine employee ownership with a qualified retirement plan. Worker Cooperatives take a different approach, placing more emphasis on the goal of empowering employees through collective decision making and democratizing operational decisions. And yet another model, Employee Ownership Trusts, increases employee compensation by distributing company profits directly to employees every year.

● Be creative in leveraging resources or identifying new opportunities that can support EO as a way to create or retain jobs and strengthen communities; and

● Develop ways to educate the public on what EO is and which companies around the State and in their local communities are employee-owned.”

New York ranks fourth nationally in the number of ESOPs, and these plans hold more assets than those in any other state. State policymakers could consider additional opportunities to educate businesses, workers and labor organizations on the advantages and risks associated with different forms of employee ownership and, if appropriate, leverage resources to assist New York companies pursuing these business models.

Thomas P. DiNapoli State Comptroller

The first objective, the report said, could be realized by creating a state employee ownership center either within the state, through a university, or through a nonprofit. The report notes that New York City set up its own outreach effort that could serve as a model. The state could also create a public education program through public service ads and other broad efforts.

At this time, there are no bills in the state legislature to move forward on these proposals, but the report could be used to spur action in the next session.

ACROSS THE AISLE

Strange Bedfellows

Another election —and another cycle of the left trashing the right, the right trashing the left, and the middle seemingly disappearing. It can make us despair about finding common ground. But that is exactly what has been achieved with employee ownership for decades. So it seemed a good time to bring up some voices from all sides to remind ourselves how special this idea is.

Read more Ownership News on page 7 See story on page 3

The NCEO is a self-sustaining nonprofit membership organization that helps employee ownership thrive. We provide practical resources and objective, reliable information on employee stock ownership plans (ESOPs), equity compensation plans, and ownership culture.

EMPLOYEE OWNERSHIP REPORT

©2022 National Center for Employee Ownership Permission to reprint must be requested in writing.

ISSN: 0899-8833

Employee Ownership Report is published online monthly by the National Center for Employee Ownership.

For membership fees or information, contact:

National Center for Employee Ownership membership@nceo.org 510-208-1300 NCEO.org

NCEO STAFF:

Megan Bonwell

Joanne Burns

Evelyn Castro

Michelle Cronin

Grace Dawson

Nan Fitzgerald

Timothy Garbinsky

Dallan Guzinski

Nathan Nicholson

Jaymie Oviedo

Scott Rodrick

Ramona RodriguezBrooks

Aaron Supple Charlene Thomas Ivette Torres Suzanne Vinson Nancy Wiefek

SENIOR STAFF: Corey Rosen EXECUTIVE DIRECTOR: Loren Rodgers

STAFF HIGHLIGHT

Nan Fitzgerald

Nan joined the NCEO in 2022 as executive assistant, bringing with her several years of experience as both administrative support staff and in a management capacity involving myriad administrative responsibilities. Nan’s educational and work background is primarily in the fitness industry where she coordinated multiple programs and managed fitness professionals, both of which required her special skills in organizing. Besides having a clear talent for it, she derives great satisfaction from creating order out of chaos.

When Nan is not at work, she can be found out on a trail in her hometown of Asheville, NC, in the kitchen cooking up something delicious, spending time with friends and family, out listening to (and/ or dancing to) live music, or traveling somewhere—preferably abroad. n

Succession Planning Is for Everyone

By Loren Rodgers, NCEO Executive Director

Succession planning for the CEO is one of the higheststakes transitions a company will face. At the NCEO, we talk with a lot of companies that have gone through multiple successions. We have learned a few lessons not only about minimizing the risks of the transition, but also about how to build it into the fabric of the company.

Focus On the System, Not the CEO

Although the CEO is where many of a company’s functions converge, a wellmanaged transition plan acknowledges that the company is a complex system and relies on the strengths and sustainability of that system. For example, the CEO transition profoundly affects the rest of the executive team. Part of the process of onboarding the CEO should include revisiting the job descriptions of the CFO, operations executives, sales directors, and senior human resources director. Well-managed transitions will allow both professional growth for other executives and the rationalization of the executive team.

Another part of the system is your company’s employee ownership, and your evaluation of CEO candidates should include ensuring they have the temperament and values to nurture the company’s commitment to employee ownership.

Do Not Simply Replace the Current CEO

Even if the current CEO of the company has led the company to extraordinary success, the next CEO should be the person who matches the company’s future, not its present. This idea is simple to write, but to execute the company must have done sufficient strategic planning to know how (or if) it wants to be different in five years from how it is now. The CEO’s responsibilities are holistic, so they must demonstrate both understanding and support for your company’s strategic plan, from easily quantifiable financial objectives to higher-touch goals around people and culture.

The Board Needs to Be Ready

The board is neglecting its responsibilities if it lets the selection process crowd out its plan for supporting CEOs in their first years. The board should develop clear expectations and a process for regular check-ins with the new CEO. Preparing for a CEO transition may be the most time-intensive task a board takes on, but the board should expect the year after the transition to put greater-than-usual demands on its time and attention. This is not an invitation for the board to micromanage the CEO, but the board should be assertively inquisitive.

Involve People in the Transition

Imagine a workforce that learns in an unannounced company meeting that someone unknown will become the company’s CEO. That workforce is being asked to take a leap of faith and entrust its economic well-being to a stranger, and that new CEO is being asked to start their new role at a deficit. How much better for a CEO to start knowing, at a minimum, that some or all members of the workforce had a chance to ask questions and share their impressions with the search committee.

Succession Planning Is for Everyone

The best way to improve is practice, and companies that build succession planning into what they do annually are simply better at it. Some of our member companies ask every employee-owner, as part of their professional development, to consider who ought to be their successor, both in case of an emergency and as part of a longterm plan. Universal succession planning is a natural way to encourage everyone to think about the career path of their supervisees. A positive career path is among the best ways to retain talented people. If those people know that everyone at the company is focused on growth and building the future, it becomes easy for them to feel excited about the prospects for the growth of the company and their stake in it. n

Loren Rodgers

Strange Bedfellows: What the Left, Right, and Middle Have Said About Employee Ownership

Ronald Reagan: “I can’t help but believe that in the future we will see in the United States and throughout the western world an increasing trend toward the next logical step, employee ownership. It is a path that befits a free people.” (1987)

Bernie Sanders (I-VT): Senator Sanders has arguably been the most active proponent of employee ownership in the Senate. “The time has come to substantially expand employee ownership in America. Study after study has shown that employee ownership increases employment, increases productivity, increases sales, and increases wages in the United States. This is in large part because employee-owned businesses boost employee morale, dedication, creativity and productivity, because workers share in profits and have more control over their own work lives.”

“Employees in worker-owned companies are not simply cogs in a machine owned by someone else. They play a central role in determining what the company does and how it is run.” (2020)

Ron Johnson (R-WI): One of the most conservative members of the Senate, Johnson introduced legislation to promote ESOPs in 2020. “I actually worked at one [an ESOP company] … and it’s a great form of ownership. Every employee participates. They participate in the earnings of the company, generally set up as a retirement type of plan. It’s a really good ownership structure for a capitalist society. I think it would also help alleviate the inequality gap as well.” (2020)

Russell Long (D-LA): Russell Long, son of populist Louisiana governor and presidential candidate Huey Long, was the legislator most responsible for ESOPs becoming a tax-favored part of retirement law. He made the issue one of his key priorities. “Employee stock ownership has grown in popularity all across this country over the past decade.

I am convinced that this ownership issue goes to the very heart of just what sort of economic system we mean to have in the United States, and just what sort of Nation we intend to leave for succeeding generations of Americans.”

“Employee stock ownership is not a partisan issue; rather, it is an issue that cuts across party lines in an attempt to bring out the best in our free enterprise system. It is only fair and right that those who work to make this economy succeed should have an opportunity to share in that success. It is a matter of simple common sense and basic equity.” (2005)

Dean Phillips (D-MN): Dean Phillips is a self-described “radical pragmatist” Democrat who has become one of the most active ESOP advocates in the House: “With 265 employeeowned companies, Minnesota leads the nation per capita. This is the American capitalism which policymakers should be encouraging and supporting, and I’m committed to inspiring more ESOPs and more sharing of success by our nation’s businesses.” (2021)

James Risch (R-ID): One of the Senate’s most conservative members, Risch was a prime sponsor of the 2018 Main Street Employee Ownership Act. “I’m glad to introduce this legislation that would utilize SCORE’s existing network of volunteers to educate entrepreneurs on the benefits of employee stock ownership plans, which I strongly support… Advocates for ESOPs tout their power to inspire employee satisfaction, retention, engagement and loyalty in companies of any size. Risch says 13.5 million employees now participate in 7,000 ESOPs nationally, reaping 12.5 percent more than their peers in wages and retirement contributions.” (From a 2017 press release)

Jared Polis (D-CO): Jared Polis is the governor of Colorado and the leading advocate for employee ownership among governors. He is also someone who practiced

what he preached in the businesses he created prior to becoming governor. Colorado has the most comprehensive state program to promote employee ownership thanks to his efforts.

“Colorado is proud to be a leader in employee ownership across the nation. Employee ownership is an amazing way to attract, retain, and engage employees with a benefit that keeps giving. We’ve seen incredible growth for businesses with employee ownership because their employees are genuinely excited about their work, have a voice, and want to show up each day because they know they have an ownership stake in their work. Employee ownership is also a guaranteed succession plan, so you don’t have to worry about who’s taking over after you. Your trusted employees who helped build your business and can maintain your legacy.” (2021)

Mitch McConnell (R-KY): “Kentucky [ESOP companies] provide badly needed jobs today and they also provide retirement benefits for citizens who may find very challenging. Being pro-ESOP means being pro free enterprise, pro job growth and pro-American. ESOPs are the essence of a high-performing free enterprise economy.” (2012)

What Explains This?

The list of leading politicians who have endorsed employee ownership could go on for pages. It has been raised by only one presidential candidate, however: Bernie Sanders. As we discussed in the November 2022 issue, support for ESOPs is broad but the idea is rarely a priority.

The broad support stems from a few sources. First, the data shows that employee ownership works for companies, owners, and communities. Second, ESOPs do not require anyone to give up anything—the idea focuses on how future wealth is distributed. Finally, ESOPs provide a way to help sustain capitalism but also make it more fair. It is hard to think of other approaches that combine all these benefits as well as ESOPs do. n

Common ESOP Administration Errors and How to Avoid Them

At our recent Fall Forum, Jamie Kwiatek of Polsinelli and Antony Brunsvold of Blue Ride ESOP Services discussed some of the most common errors in ESOP plan administration and how to avoid them. Some errors can only be corrected through compliance programs set up by the IRS or the DOL, but many others can be selfcorrected if they meet the criteria for doing that. Of course, it is even better if you can avoid making the errors in the first place.

Kwiatek and Brunsvold laid out several common issues:

Failing to Report or Value Synthetic Equity for Section 409(p) Testing: Section 409(p) of the tax code was created to help prevent too much of the benefit in an ESOP from being allocated in any plan year to certain individuals who own more than 10% of the fully allocated equity in the company (or a combined 20% for family members). Ownership includes both what is allocated in the person’s ESOP account, direct ownership, and synthetic equity. That includes stock appreciation rights, phantom stock, deferred compensation, split dollar life insurance, and any other claim on future assets or income.

An error can occur because the third-party administrator (TPA) did not ask or was not told about any synthetic equity the company offers. Maybe the plan sponsor left the question blank, or did not understand that things other than equity awards count. You cannot self-correct this, and it could result in plan disqualification. To prevent it, the TPA should inquire each year if are any changes in synthetic equity or other factors included under the 409(p) test (such as family relationships) that have changed. The ESOP trustee and the board of directors should review the test annually. If your company is an

S Corporation, make sure the test is being performed and reviewed annually, but remember that the 409(p) test is a “daily test,” so make sure the test can be passed before synthetic equity is issued.

Another synthetic equity issue is when and how these rights are valued. If the stock value drops, the percentage of ownership attributable to SARs and phantom stock may go up. Similarly, the value of deferred compensation and similar synthetic equity will constitute a larger percentage claim on total equity. To help prevent this, specify a date in the plan document to determine the value of employer stock and therefore the number of synthetic equity shares. The date can be an annual date, such as the value as determined as of the last day of the prior plan year, or it can be set for some number of years, which would give the most stability to the determination.

Diversification Errors: In a worst-case scenario, a new TPA discovers that the client has never offered diversification elections to plan participants even though the plan has been in existence for well over 10 years. Diversification is required after 10 years of participation, so this can end up as a plan operational failure. A key issue will be how significant the failure was—who was affected and by how much. The problem is not eligible for self-correction if the amounts are significant and the correction occurs two years or more after the plan year in which the failure occurred. The company now needs to enter a formal voluntary compliance program, identify the participants not provided an opportunity to diversify (and for what years, what number of shares, and at what stock price). Participants will need to be offered an opportunity to diversify at a price the appraiser and trustee determine is appropriate.

To prevent this, make sure diversification is part of the TPA’s engagement letter and that the company and TPA have the correct procedures in place to keep track of the obligation.

Compensation: ERISA place limits on what counts as eligible pay for making contributions. In addition, if sellers take advantage of the Section 1042 rollover, the seller, family members, and any 25% owners cannot get allocations, so their pay is not eligible. Compensation definitions can also vary (do bonuses or fringe benefits count, for instance). The TPA and company need to be on the same page on this issue.

Companies that have a 401(k) plan and an ESOP may not use the same definition of pay in both plans, especially if they were drafted by different attorneys. It is easy to report inaccurate compensation data under this scenario. However the compensation error occurs, the result can include inappropriate allocations, violating nondiscrimination rules, or contributions greater than allowed limits.

If there are errors, the company needs to redo annual allocations for all the years there is an error or compensation nondiscrimination testing problem. This could mean people who were paid their balances could have more due to them or were overpaid. This causes a new error that has to be properly corrected.

Exceeding Annual Contribution Limits: In companies with both an ESOP and 401(k), there is a combined annual limit for what the company and employees contribute. This is especially true if higher paid people contribute enough to the 401(k) to push them over the maximum annual allowed level. If this happens, the company has to give the money back. Limits in a plan where a loan is being repaid can also be exceeded if there are significant layoffs, now making the eligible pay lower. To correct for this, the loan term might be extended or dividends used to repay part of the loan.

Dividends: Dividends to repay a loan can only be applied to the shares acquired by that loan. Errors can cause a lot of reallocating, which can in turn cause other problems. Make sure the TPA is clear on this issue beforehand. n

CASES & RULINGS

HIGHLIGHTS:

● Valuation Firm Must Pay Fiduciary Insurer

● World Travel Lawsuit Settled

● Deadline for Plan Amendments Extended

● DOD Issues Guidance on Pilot Program for 100% ESOP Contractors

Stout Risius Must Pay Fiduciary Insurer: In Great American Fidelity Insurance Company v. Stout Risius Ross, Inc. et al., No. 2:19-cv-11294 (E.D. Mi, Nov. 1, 2022), a district court ruled the ESOP valuation firm Stout Risius must pay $60,000 in costs the company argued should have been covered by its insurer, Great American Fidelity Insurance Company. Great American had claimed it did not have to defend or indemnify the ESOP appraisal firm Stout Risius Ross over allegations about its valuation work for Appvion, an ESOP company that went bankrupt. All the federal claims under ERISA have been dismissed in the case, but state securities laws claims are still being litigated. Great American claims it is not liable because of an exclusion clause it claims exempts it if the defendant can be shown to have violated ERISA or securities laws.

The court found that Great American had failed to carry its burden of showing as a matter of law that an exclusion in its agreement “applied to at least two of the underlying claims in the Appvion ESOP action because they were statelaw tort claims, and to at least two of the underlying claims in the Appvion Trust action because they were bankruptcy claims.” However, the court approved an amended motion saying it was not required to defend Stout Risius Ross over securities law claims.

World Travel Lawsuit Settled: In Ahrendsen, et al. v. Prudent Fiduciary Services, LLC, et al., No. 2:21-cv-02157 (E.D., PA, Nov. 7, 2022), the plaintiffs agreed to settle a lawsuit in dispute over the company’s ESOP valuation. An ESOP bought World Travel from members of the Wells family in 2017 for $200 million.

Plaintiffs alleged the plan overpaid because of faulty projections, including not accounting for liabilities for potential refunds of commissions to its clients, improper discount rates, and using the wrong discount rates. The plaintiffs also alleged that the ESOP paid for control it did not have because the sellers retained board control.

IRS Extends Deadlines for Certain Plan Amendments: In IRS Notice 2022-45, the IRS extended plan amendment deadlines for compliance with two recent laws. These include:

● Section 2022 of the CARES Act, which provided for COVID-related distributions, increased loan amounts, and delayed loan repayments.

● Section 302 of the Disaster Act, which provided favorable tax treatment for certain disaster-related loans or distributions.

Amendments for these CARES Act and Disaster Act provisions had been required by the end of the 2022 plan year. The notice also clarifies that CARES Act and Disaster Act amendments adopted before the new December 31, 2025, deadline will not cause the plan to fail to satisfy anti-cutback requirements.

Guidance Issued on New Department of Defense ESOP Pilot Contract Preference Program

The most recent National Defense Authorization Act created a pilot program, known as Sec. 874, that allows the DOD to award certain follow-on contracts without initiating a competitive process to an employee-owned business that meets the definition of a “qualified business.”

In an undated memo issued in November, the department provided guidelines under the program. The memo stated that “contracting officers supporting a program selected for participation in the pilot will be able to award a follow-on contract for the continued development, production, or provision of products or services that are the same or substantially similar to those procured by DOD under a previous contract with a ‘qualified business’ under the authority of § 3201(c)(5).”

Participation in the pilot program is subject to the following limitations:

● Only DOD Contracting Officers may submit an application to participate in the pilot program.

● To receive an award under the pilot program, the qualified business must have a minimum performance rating of Satisfactory (or the equivalent) for the predecessor contract in the Contractor Performance Assessment Reporting System (see Federal Acquisition Regulation (FAR) Subpart 42.15, Contractor Performance Information, page 2 of 3).

● Submissions will be accepted until April 28, 2023, or until the DOD approves nine contracts for award under the pilot program.

● Any follow-on contracts awarded without providing for full and open competition under FAR 6.302-5 and this pilot authority shall be awarded no later than August 31, 2023.

● A qualified business will be limited to a single opportunity for the award of a sole source follow-on contract.

● Not more than 50% of the amount paid under the follow-on contract may be expended on subcontracts.

The Employee-Owned Contractors Roundtable (ECR), a group of 100% ESOP federal contractors, has led the effort in advancing this pilot program and other provisions targeted at promoting ESOP federal contractors. ECR members are expected to work in the new Congress to further perfect the pilot and are in active conversations with the DOD and Capitol Hill. For more information on ECR and Sec., 874, please email Matt Pearce n

Correction

In the last issue, in the discussion of the case Best et al v. James, we said that a new inexperienced trustee, Steven James, was appointed in the case. We should have said plaintiffs alleged that. Mr. James in fact very experienced in this field. Our apologies for the error.

OWNERSHIP NEWS

2023 Plan Limits Announced

In Notice 2022-55 (October 21, 2022), the IRS announced the largest increase in annual limits for retirement plans in many years. The new limits applicable to ESOP companies are in the table at right.

A more detailed summary of all the plan limits is available on the IRS website.

The new plan limits mean employees and employers can contribute more to their defined contribution plans. The total contributions are still limited, however, to 25% of eligible payroll (the payroll of those in the plan making $330,000 or less in 2023). The highly compensated and key employee definitions are used for 401(k) testing and top-heavy plan testing purposes, while the five-year distribution limits allow companies to extend a normal five-year ESOP distribution for additional years if the distributable amount exceeds (in 2023) $1.33 million and the annual installment payment exceeds $265,000.

SBA Says Main Street Employee Ownership Act Has Not Produced Many ESOP Loans

The 2018 Main Street Employee Ownership Act was intended to spur lending from the Small Business Administration for ESOP transactions. While the law seemed very clear that ESOPs should be included in the SBA’s 7(a) lending program (a program that allows borrowers to get loans through SBA-approved lenders rather than having to navigate the more cumbersome process of going to the SBA directly), SBA guidance on the act excluded ESOPs from the 7(a) program, as well as adding other requirements

New Annual Limits for Retirement Plans 2022 2023

Maximum elective deferral to 401(k) plan $20,500 $22,500 Catch-up contribution for those 50 and older $6,500 $7,500

Annual addition limit (employer plus employee contributions) for all defined contribution plans $61,000 $66,000

Definition of highly compensated employee $135,000 $150,000

Definition of key employee for top-heavy plan testing $200,00 $215,000

Annual eligible compensation limit $305,000 $330,000

Five-year distribution limit for ESOPs $1,230,000 $1,330,000

Annual distribution dollar amount to determine five-year ESOP distribution limit $245,000 $265,000

for equity in the deal and a separate valuation, that have made the law cumbersome at best.

In a September 26, 2022, proposed rules change affecting non-ESOP transactions, the SBA reports that “over the past 4 completed fiscal years (FY 2018 through FY 2021), SBA processed a total of 206,415 7(a) loans, of which 31,940 loans (approximately 15.5%) included loan proceeds used to affect a change of ownership. ESOP loans (loans to assist an ESOP trust in acquiring 51 percent or more of the equity ownership in the small business concern) accounted for only 17 loans in the four years between FY 2018 and FY 2021, or fewer than five loans per year, and therefore ESOP loans have not made the anticipated impact in transitioning small businesses to employee ownership as originally intended by the Agency.”

The language “as originally intended by the Agency” is ironic, of course, because while Congress intended the program to

spur ESOP lending, SBA regulations had the opposite effect. Comments on the proposed changes can be made through December 27. While the changes do not affect ESOPs, because they are mentioned in the proposal, it would still be appropriate to comment.

New Morgan Stanley Survey Shows HR Leaders and Employees See Equity Compensation as the Best Way to Engage Employees

A new financial wellness study from Morgan Stanley of 1,000 U.S. employed adults and 600 HR executives found that 95% of HR leaders (up from 92%) and 80% of employees (up from 75%) agree that equity compensation and stock ownership are the most effective ways for companies to keep employees motivated and engaged.

The survey report, The State of the Workplace Financial Benefits, comes from a survey of 1,000 U.S. employed adults and 600 HR executives. n

EMPLOYEE OWNERSHIP Q&A

Our new ESOP client says that the valuation date should be the date the valuation is completed. The plan year ends 12/31 and the valuation is done as of that date, with any distributions that occur prior to a new valuation priced at the most recently completed valuation. What is correct?

As lawyers often say, the answer is, “It depends,” although it would be odd to have the valuation date defined as when the appraisal is completed (and even then it should be when the trustee approves it, because it could be completed but then changed). Plans have specific valuation dates, not a movable target such as when the valuation is approved.

A key issue is what the plan requires and, if applicable, allows. If the plan says that all distributions occur as of the most recent valuation, then that is the one you use absent some special circumstances and only then if the plan allows for a significant change in economic circumstances. During the pandemic, we asked a number of experts about this, and they agreed that having an interim valuation is possible and supportable under court decisions if it is likely the stock price has significantly declined. The same argument could be made if there is reason to think the price should be a lot higher (if the company acquired a very large new customer, for instance). Some advisors suggest it is possibly even required as a prudent exercise.

If you do decide to have an interim valuation, one suggested approach is for the board of directors to amend the plan document (unless it already provides for this) to allow for an interim valuation to be done by the trustee. The board might also consider amending the plan to require an interim valuation, so that this is not an exercise of fiduciary decision, and less subject to challenge under ERISA.

Of course, all this is still tricky because the new appraisal takes time and things can change even more. That is why many advisors would say that using the valuation date specified in the plan should be the rule absent some major change. It is also important to understand that if a company does this,

for instance, because it thinks its stock price is too high under the existing valuation, but then does not do it for the opposite circumstance, this course of action could be cause for litigation.

There are new tax credits for energy efficiency investments. As a 100% ESOP S corporation, can we get these credits?

100% ESOPs can get tax credits only if they are against payroll, so these credits are not useful.

Is there a required minimum mandatory annual contribution to an ESOP?

There is no legally required minimum contribution to an ESOP, although if you are paying off a loan, of course, there is a required payment on that. If you stop making contributions to an ESOP for a few years (or any other ERISA plan), the plan can be considered terminated, however.

We have an ESOP where the seller chose the tax deferral option under Section 1042 of the Code. We have a 401(k) where we match employee deferrals with stock from the ESOP as the loan is repaid. Because we cannot reallocate shares to the seller or members of his family, can we instead make their matching contributions in cash?

That is not allowable under Code Section 409(n) and could create an excise tax for the company. 409(n) is the Code section that prohibits reallocation, but it also prohibits any make-up allocations in other forms such as the one suggested here. The problem, of course, is that not making the match then violates the 401(k) rules. You would be better off making the match in cash and keeping the ESOP separate. If that is not affordable, you may need to drop the match while the reallocation period still applies.

We have an equity investor who may be interested in taking a stake in our 100% ESOP-owned company. But if we give the investor stock in return for the cash, we will end up about 70% ESOP-owned and have to make very large distributions to the

ESOP so that the investors can get a distribution to pay taxes. Are there alternatives?

There are a couple of possibilities to solve this problem. The investor could take warrants instead of shares. This gives the investor the chance to buy the right to a certain number shares for some years into the future at the price at the time of the investment. The investor would cash in the right at a future point if the share price goes up. The company remains 100% ESOP-owned at all times. A second option is to use the investment for a specific project and create a drawn-down entity that is owned by the parent but that the investor has a stake in.

We are moving to internal trustees. One option we are considering is having one or two employees sit in on trustee meetings but not be trustees. They would cycle onto the committee when current people leave in the future. Do they have any fiduciary liability?

They would not. This is a very useful approach if you have enough interested people. It gives the incoming trustees a chance to learn the ropes without having to make decisions. A key issue is whether enough people want to do this. It does require significant time, and the employees should get some form of training (attending conferences, for instance). But it also means more people in the company will really understand the ESOP and be able to help explain it to their colleagues. n

Have a question about ESOPs? We welcome you to contact us by phone or email. We also maintain the online ESOP Q&A , an important member benefit containing answers to over 700 common—and not so common— questions about all aspects of ESOPs. You can browse by category or search for a topic.

● Recently-minted ESOP Day’s Jewelers has announced that in response to employee feedback that its stores will be closing on Sundays. The Maine- and New Hampshire–based jewelry retailer, which has roughly 140 employees spread across eight stores, has been named one of the “Best Places to Work in Maine” for the past seven years and prides itself on being responsive to employee needs and committed to work-life balance. When a majority of employees made the request for Sundays off, the company took the decision seriously. It even went so far as to survey customers to see if they would shop elsewhere on Sundays if Day’s were closed, and 92% of the 1,000 customers surveyed said they would remain loyal to Day’s. Trusting employee-owners to make these decisions is a big part of why Day’s became an ESOP in the first place. President Joe Corey elaborated on the decision saying, “Our company has always been very autonomous, very employee-centric, giving people the responsibility to make decisions…The more they feel they are owners in the company and really participating, the more vested they will be…No matter what your position is, you can still have a voice in this.”

● Harp’s Foods, a supermarket chain headquartered in Springdale, Arkansas, has announced that it is acquiring The Markets, an independent grocer with seven stores in Louisiana and Mississippi. These locations and employees will be added to the 6,800 employees who work at Harp’s 135 stores in Arkansas, Oklahoma, Missouri, and Kansas. Harp’s was number 16 on our most recent Employee Ownership 100 list.

● Hatco, another 100% ESOP-owned company that manufactures food preparation equipment, announced that it has acquired Food Warming Equipment Company. And ESOP-owned Jasper Holdings Company, an engine manufacturer, has announced that it has purchased Jer-Den Plastics, one of a number acquisitions Jasper Holdings has done in recent years.

● Condé Systems of Mobile, Alabama, has announced that it is now employeeowned by an ESOP. Founded in 1992, the company specializes in all aspects of personalized photo gifts, from design software to direct-to-garment technology and more. President David Gross explained the sale as prioritizing Condé’s customers while allowing for the company to focus on sustainability and reward employees in equal measure. He said, “This transition is the best step for us as it reinforces our commitment to serve our clients in the best way possible and also supports the sustainability of our company. Our clients can now have an additional level of confidence that our firm is here to serve their needs far into the future. Equally, our employees now have an opportunity to accumulate financial wellbeing not only through compensation but also through the ESOP.”

● Progressive, a manufacturer of flooring for the hospitality industry, became a 100% ESOP in 2018. Vice President Nino Cervi told Chain Store Age that “the bottom line is that an ESOP empowers our people. Their excitement, hard work, and commitment to providing our clients with strong relationships and the best possible product directly increases their own bottom line. Happy customers make profitable companies. The better we do for our clients, the more profitable we become, the more valuable the company is, and the more integral the employee ownership is to its continued success.” n

NCEO BOOKSHELF

For a complete listing of books and other materials on employee ownership and ownership culture, visit us at NCEO.org.

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Thank you!

From all of us at the NCEO, thanks to all of our members for helping make employee ownership thrive in 2022. We’re excited to continue our mission next year, and beyond, thanks to your support.

A Great Idea on How Spread the Word About Employee Ownership at Your Company on Your Social Networks

Jesse Tyler at employee-owned Hypertherm is one of the most creative people we know in terms of coming up with ideas on how to communicate employee ownership and how to get employees engaged as owners. So we asked him what he could come up with as a way to spread the idea of employee ownership on social media and within your own company. His idea, we think, is a real winner. Here’s how it would work. A company would send out a series of questions to its employees asking them to describe the experience of being an employee-owner. You can do one question each month.

To help encourage participation, maybe give out a few fun prizes, one of two for the best ones and a few random ones for just entering. You might want to limit how many times any one person can win. The answers should be brief—a sentence or two. Post the responses internally, but then pick a few of the best and put them in a post on your social media accounts, such as LinkedIn or Facebook.

By posting to your connections, you can help market your company and employee ownership at the same time. Asking the questions each month is an effective, fun and easy way to remind people about what employee ownership means.

Here Are the 11 Questions Jesse Suggested

1. How do you talk about ownership when you are out in the world, not around other owners?

2. How do you describe the experience of ownership to your friends and family?

3. What is your nutshell way to help new coworkers understand ownership?

What is your employee ownership “aha” moment?

4. What does ownership mean to you?

5. If you had to describe ownership in three words, what three words would you share?

6. What is different about working at an ESOP? I believe, and this is why….

7. Is leadership different at an ESOP? If yes, how? (From both the reporting and leader viewpoint)

8. What is one thing your company does well on ownership culture and communication that you want to share?

9. What is your employee ownership aha moment? It’s not the first time you heard about employee ownership or when you started to like it. It’s that moment when you said “aha” employee ownership is going to be a game changer. Have you had an employee ownership moment that you’d like to share?

10. What keeps you coming back to work each day?

11. What have you done to promote employee ownership outside our company?

We raised this idea at the NCEO’s Innovative Communications Coalition meeting in October, and Darin Olivarez of Black & Veatch had a great idea that could be number 12. The company

already asked employees to fill in the question “Together we….” It could be anything that people think they do together at Black & Veatch. To see what employees came up with, see the page at Black & Veatch’s web site.

Of course, these questions are only suggestions. Other ideas might include:

1. As an owner, do you feel you have more of a voice at work? If so, can you give an example?

2. Why would you tell a customer that it is better to buy from an employeeowned company?

3. Has being an owner ever made you feel like work is more of a community? Tell us how.

4. How do you think the economy would be better if many more companies were employee-owned?

Finally, to help people seeing the posts understand what employee ownership is, you can link to a basic article on the NCEO website, What Is Employee Ownership? or to a visual explanation, How an ESOP Works. n

We would love your feedback on this idea. Email your comments to Corey Rosen.

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Register Today for These 2023 Events

Solidify Your Legacy with Employee Ownership

Since 2010 the NCEO’s Is an ESOP Right for You? meeting series has helped business owners decide if an ESOP fits their succession needs.

This year, join us in February at the Marriott Bidwell Hote, Portland, Oregon. Enhance your company’s legacy and benefits plan with an ESOP—the most tax-efficient method of exit planning. The seminar will cover valuation, financing, legal issues, plan design, issues for selling shareholders, and communication and ownership culture.

You will have the chance to work directly with the NCEO team and other business owners to discuss all of your most pressing succession planning questions, approaches, and strategies.

Register today to secure your spot at this seminar and gain an understanding of how ESOPs work. Space is limited— don’t wait!

Get an Early Bird Rate for the Annual Conference!

The 2023 Employee Ownership Conference at the Kansas City Convention Center will feature the most technical education of any ESOP community event or conference.

With over 110 breakout sessions, you will find a wealth of ways to scale up your business success. From peer-to-peer networking to a completely reimagined agenda featuring new and hands-on workshops and breakout sessions like you’ve never seen before!

This conference will continue to deliver best-in-class education to the employee ownership community, including introductory sessions geared toward new employee-owners and sessions based on job role, technical to novice—our conference has it all!

Early bird registration is open. Get first dibs on the best pricing of the season. Early pricing is limited to the first 200 registrants. Start saving today!

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