An S-ESOP is a business that provides flow-through tax treatment to its shareholders, and in which the shares are owned by the employees’ qualified defined contribution retirement plan. Taxes on the appreciated value of the stock in the retirement plan are paid when the employee eventually sells his or her shares while in retirement. This tax treatment is similar to that of a traditional defined benefit or defined contribution retirement plan.
Firms organized as S-ESOPs enhance the retirement security of their workers, as contributions by the employer—together with growth in the value of the stock—over time can provide a powerful boost to employees’ retirement savings. They do this by giving employees ownership of the company and building their retirement security with set-aside funds in ESOP accounts.
This stands in stark contrast with the fact that, according to the Employee Benefit Research Institute, only half of Americans in 2008 worked for an employer that provided employees with any kind of retirement savings plan, and not much more than 40 percent of workers participated in such plans. Additionally, a 2008 University of Pennsylvania study found that S-ESOPs contribute substantially in new savings to their workers.
When nearly 60 percent of working Americans have no work-related retirement plan, S-ESOP firms play an important role in contributing to their employee-owners’ retirement security—an ownership stake in their employer is a form of diversification compared to workers who otherwise rely on government retirement plans such as Social Security. In addition, studies have found that 80 percent of S-ESOP firms offer workers retirement savings plans beyond the ESOP—and many of these firms make employer contributions to workers’ retirement savings in these plans.
In addition to their ability to help with retirement security, S-ESOPs are high-performing businesses that create jobs and economic activity. A 2010 study I co-authored for the Employee-owned S Corporations of America (ESCA) found that S-ESOP firms were more resilient through 2008 in the face of the recession, with better employment performance than non-ESOP firms. In fact, while overall U.S. private employment in 2008 fell by 2.8 percent, employment in S ESOP companies rose by nearly two percent. Expanded opportunities for S ESOPs would provide the benefits of this structure to more working Americans.
Tax policies for retirement saving can be viewed through both the “micro” lens of how to improve retirement security for individual families and through the “macro” lens of how to boost overall national saving and thereby improve U.S. growth and job creation. On the individual level, the looming fiscal challenges facing the United States likely imply that families must anticipate having greater responsibility for preparing for retirement, because the U.S. government will be less able to participate directly in providing for retirees. The S-ESOP works on both micro and macro dimension by boosting retirement preparedness while contributing to increase saving and U.S. economic vitality. This is good for workers, business and for the U.S. economy as a whole.
Phillip Swagel is professor of international economic policy at the University of Maryland School of Public Policy and a non-resident scholar at the American Enterprise Institute. He was Assistant Secretary for Economic Policy at the Treasury Department from December 2006 to January 2009.