U.S. Senate Approves Pair of Bills to Boost ESOPs

Despite the government shutdown, the U.S. Senate is still busy at work, approving two bills that seek to advance and promote the formation of employee stock ownership plans (ESOPs).

Retire Through Ownership Act

The Retire Through Ownership Act (S. 2403), introduced in July by Sens. Tim Kaine (D-Va.) and Roger Marshall (R-Kan.), was approved Oct. 9 by unanimous consent, which is a fast-track process to approve legislation where no senator objects to a bill’s consideration and approval.

If enacted, S. 2403 would amend ERISA to provide a clear definition of “adequate consideration” for certain closely held stock by applying IRS valuation law to ESOPs. As such, it would allow an ESOP plan fiduciary to rely in good faith on an independent professional expert business appraiser who utilizes the valuation practices as described in IRS Revenue Ruling 59-60. 

The bill also permits the Department of Labor (DOL) to implement additional guidance but stipulates that the legislation does not expand the regulatory authority with respect to the term “adequate consideration” beyond such authority available before enactment of the Retire Through Ownership Act or modify a fiduciary's obligations under ERISA Section 404.

Adequate consideration, or the process of appraising shares in an ESOP, and the legal liability that stems from it, has been cited as the biggest hindrance to ESOP adoption.

“The Senate’s unanimous passage of the Retire Through Ownership Act is a landmark moment for ESOPs,” James Bonham, President and CEO of The ESOP Association, said in a statement. “The Senate has spoken with one clear voice on legislation that will help eliminate regulatory uncertainty and ensure that ESOPs and trustees who follow clear rules will not be subject to needless litigation and harassment by the government and plaintiffs’ bar.”

During a Senate Health, Education, Labor and Pensions (HELP) Committee hearing held in July on the legislation, the ESOP professionals testifying at the hearing agreed that clear valuation rules are essential to see ESOPs continue to grow.

There was an adequate consideration rule proposal from DOL in the closing days of the Biden administration, but it was withdrawn by the incoming Trump administration.

A House companion bill (H.R. 5169) to the Retire Through Ownership Act was passed unanimously by the House Education and Workforce Committee in September.

Employee Ownership Representation Act

Meanwhile, the Senate also passed the Employee Ownership Representation Act (S. 1728) by unanimous consent on Oct. 9. The bill was introduced in May by Sen. Bill Cassidy (R-La.), who is chairman of the Senate HELP Committee.

S. 1728 would amend ERISA to expand the membership of the Advisory Council on Employee Welfare and Pension Benefit Plans — a.k.a. the ERISA Advisory Council (EAC) — to include representatives of employee ownership organizations.

More specifically, the bill would add two representatives of ESOPs to the EAC, which is a 15-member body appointed by the Secretary of Labor to advise the DOL on matters related to ERISA. No member currently is charged with representing the interests of ESOPs specifically.

The legislation also would establish an Office of Employee Ownership within the DOL, but outside of the Employee Benefits Security Administration. The director of such office would be responsible for carrying out the Employee Ownership Initiative established under Section 346 of the SECURE 2.0 Act.

Similarly, S. 1728 would also establish an Advisory Council on Employee Ownership consisting of seven members appointed by the Secretary of Labor to serve for terms of two years.

Of the seven members, four would be appointed to represent employees, one to represent companies that have established an ESOP or eligible worker-owned cooperative, one to represent ESOP providers, and one to represent associations or other membership organizations for ESOPs. In addition, no more than four members could be from the same political party.

Finally, the bill would require the Secretary of Labor to appoint an Advocate for Employee Ownership within the Employee Ownership Initiative. The advocate would, among other things, provide public education and assistance related to the expansion of employee ownership, consult with the head of the ownership initiative, and act as a liaison between the DOL and ESOP stakeholders.

The advocate would also be required to submit an annual report to Congress containing recommendations to resolve barriers and incentivize practices that promote employee ownership.

SECURE 2.0 appropriated $50 million from 2025 to 2029 to create educational programs for ESOPs.

Both bills will now go before the House of Representatives.