How Retirement Security Legislation Impacts ESOPs

A Senate committee has approved a measure to expand employee access to workplace retirement plans. It seems like a simple enough statement that might not register as newsworthy, but this is anything but simple and in fact, history has been made!

In June 2022, the United States Senate Health, Education, Labor, and Pensions (HELP) Committee passed S. 4353, the Retirement Improvement and Savings Enhancement to Supplement Healthy Investments for the Nest Egg (RISE & SHINE) Act.

This is less than two weeks after releasing a discussion draft and includes significant provisions that promote employee stock ownership plans (ESOPs) and requires the U.S. Department of Labor (DOL) to provide regulatory guidance that the ESOP Association has sought for over forty years. 

To help you gain a better understanding of this bill and familiarize yourself with the updated legislature and how it impacts ESOP plans, we have gone through the salient points and unpacked them in this article. Of course, please don’t forget that you can reach out any time to consult with our team of well-versed professionals at Excel Legacy Group.

What Is The RISE & SHINE Bill?

The RISE & SHINE bill is a groundbreaking, retirement-focused piece of legislature that aims to improve retirement security by creating additional protections for workers and retirement savers at all stages of their retirement timelines.

As a bipartisan bill, it is jointly sponsored by committee Chair, Patty Murray (D-WA) and Ranking Member, Richard Burr (R-NC). 

There are a number of features included from previously introduced bills, such as: 

  • Allowing 403(b) plans to participate in multiple employer plans. 
  • Reducing the requirement for part-time workers to participate in an employer’s retirement savings plan to two years of service from three years. 
  • Permitting employers to offer workplace emergency savings accounts linked to defined contribution plans. 
  • Requiring pension plan sponsors to provide participants and retirees with key information when offering lump-sum buyouts.
  • Allowing employers every three years to automatically re-enroll workers who previously opted out of a retirement plan.

The fact of the matter is that, much like the rest of the world, Americans are continuing to face historic inflation on gas, groceries, and other everyday essentials. It is now, more than ever, vital that they be able to safely and actively invest in financial planning. 

To that end, the RISE & SHINE bill provides Americans with a significant retirement package that will ensure that current and future retirees have the information and resources they need in order to optimize savings for their golden years.

How An ESOP Functions As A Retirement Plan

At its core, an ESOP is a type of retirement plan and as such, ESOPs are required to follow all the basic rules for tax qualification and non-discrimination that other retirement plans must adhere to. 

That said, they do differ from typical retirement plans. Firstly, an ESOP invests primarily in an employer’s stock, while a 401(k) plan generally offers various mutual funds in which people can invest funds. Secondly, while a 401(k) plans allows people to contribute their own money, ESOP contributions generally come solely from the company on behalf of participating employees.

Additionally, ESOPs follow different rules, such as the specific distribution rules and advantages for employees. These advantages include the ability to make higher annual contributions to an ESOP than to other plans and the potential to receive significant dividends on the stock.

It should also be noted that an ESOP can be built in such a way that it unlocks tax benefits that are leaps and bounds ahead of those delivered by a 401(k).

How The Bill Affects ESOPs

The RISE & SHINE bill is a watershed moment for ESOPs, and indeed, employee ownership communities across America. Make no mistake, this is a huge victory for one and all, as it makes strides towards improving retirement security through the application of additional protections for workers and retirement savers.

The reason why this is such a critical milestone is not just because the bill includes provisions for improving coverage for part-time workers, as well as facilitating more convenient and affordable access to workplace emergency savings accounts, but also because it addresses the anxiety and insecurity that many of America’s workers and retirees have about achieving a financially secure retirement.

Specifically when it comes to ESOPs, this legislation impacts these retirement plans in two significant ways.

Firstly, the legislation will require the DOL to provide formal guidance on good faith fair market value for shares of a business to be acquired by an ESOP, as defined under ERISA section 407(d)(6).  This is frequently referred to as an “adequate consideration” by ESOPs and related professionals, but in fact, this formal regulatory guidance has been absent since the passage of ERISA in 1974 and has caused costly uncertainty for ESOPs.  

Secondly, the bill authorizes up to $50 million in grants over 5 years from the DOL for increasing education and awareness about employee ownership and to promote employee ownership in states and localities, if appropriated. Ultimately, this would be the first federal grant program specifically dedicated to promoting employee ownership.

What Is The ESOP Association?

Given its intentions towards the larger employee ownership community, this bill has been supported most passionately by the ESOP Association, who are exceptionally excited to have bipartisan support as part of such an important bill.

To put it in laymen terms, the ESOP Association is the largest organization in the world, with headquarters at the International Employee Ownership Center in Washington, DC. It operates as a 501(c)6 organization with the affiliated Employee Ownership Foundation, and aims to support three main groups, namely, it supports employee-owned companies, over 10 million U.S. employees who participate in an ESOP, and the many, many professionals who provide services to them. 

What the Association does:

  • It conducts and funds academic research. 
  • It provides more than 160 annual conferences and events attended by nearly 15,000 individuals. 
  • It advocates on behalf of employee owners and their businesses to federal and state lawmakers.

According to James Bonham, President and CEO of The ESOP Association, the provisions made in the revised retirement security legislation have long been sought after. 

Let Excel Legacy Group Help 

While we hope that this information proves useful and answers your questions regarding the new legislation concerning the protection of workers and retirement savers, we understand that you may have more specific concerns. 

If this is the case, then we urge you to consult with a team of well-versed professionals who are equipped to walk you through any questions you have regarding ESOPs. 

Talk to the Excel Legacy Group today about how we can help understand the newly approved Retirement Improvement and Savings Enhancement to Supplement Healthy Investments for the Nest Egg (RISE & SHINE) Act.