August 12, 2020

The Temporary Federal ESOP Grant Act, S. 4236, introduced on July 21, 2020, and sponsored by Sen. Ron Johnson (R-WI) and Sen. Tammy Baldwin (D-WI), could be a major event for the ESOP community. The major provisions, as currently written, are set forth below.

ESOP Grant Act Current Version

  1. A grant from the Treasury Department directly to a company that either (a) forms a new ESOP or (b) increases the percentage of company ownership of an existing ESOP. (Section 2(b)(1) of the Act).
  2. A documented valuation of the sponsor company by an independent valuation expert using approaches determined by Treasury or by the trustee of the ESOP. (Section 2(b)(2) of the Act).
  3. The grant can be up to $20,000 per ESOP participant plus up to $50,000 for documented costs related to the grant process and the ESOP. (Section 2(c) of the Act).
  4. Certification that the grant will be applied to the purchase of sponsor company stock with cost reductions to the company resulting from the grant applied to the purchase of equipment, computers, land, buildings, facilities, health and safety equipment, and similar investments. (Section 2(b)(3) of the Act).
  5. Funding for the grants may be taken from unused CARES Act appropriations. No grants will be awarded by Treasury after September 30, 2022. (Sections 2(d) and (e) of the Act).

ESOP Grant Act Suggested Changes

However, certain provisions of the Act are unclear or maybe redundant to existing ESOP law and regulation, and other provisions could be expanded. I suggest the following changes and clarifications:

  1. Section 2(b)(1) could be expanded to include a company 100% owned by its ESOP to the extent the grant is used to increase the number of ESOP participants (up to $20,000 for each new ESOP participant).
  2. The valuation procedure under Section 2(b)(2) appears to be confusing or redundant and could simply reference the existing ESOP valuation provisions under ERISA Section 3(18) and Code Section 401(a)(28)(C).
  3. Section 2(b)(3) should clarify that grants are to be used for the purchase of newly-issued sponsor company stock by the ESOP and not for the purchase of sponsor company stock from non-ESOP shareholders.
  4. Because the grants are related to temporary coronavirus relief and not to earned employee compensation, the grant funds, or the sponsor company stock purchased by the funds, should be allocated equally among all ESOP participants. Generally, lower-income participants need relief more than higher-income participants. Thus, the Act should state that this will be considered a “safe harbor” allocation under Code Section 401(a)(4).
  5. Because some ESOP companies have existing ESOP loans, and many mature ESOP companies have significant repurchase obligations, including repurchase loans, the $20,000 per participant could exceed the 25% contribution limit under Code Section 404(a) and/or the $57,000 annual addition limit under Code Section 415(c). Thus, the Act should exempt the grants from both the contribution limit and the annual addition limit.

Tim Jochim is a partner in the Columbus, Ohio office of Walter | Haverfield and a national authority on business succession and employee stock ownership plans (ESOPs). Tim can be reached at tjochim@walterhav.com or at 614-246-2152.