Back to Insights

What You Need to Know about the Secure Act 2.0 and ESOPs

May 22, 2023 3 Min Read Alerts, Article, ESOPs
Andrew R. Berger, CPA
Andrew R. Berger, CPA Director, Tax Strategies

The recently-enacted Secure Act 2.0 made sweeping changes to retirement and qualified plan-related laws. The Act contains some relatively modest pro-ESOP provisions (hopefully paving the way for additional legislation in the near future) and marks Congressional support for the continued promotion of ESOP-owned companies.

The Secure Act 2.0 contains the following employee stock ownership plan provisions:

  • Expansion of IRC Code Section 1042 to include a 10 percent deferral on the sale of S corporation stock
  • Creation and funding of the Worker Ownership, Readiness, and Knowledge Act (“WORK”)
  • Directs the Department of Labor (DOL) to provide formal guidance on valuation standards related to ESOP companies
  • Changes the definition of “publicly traded” for ESOP participants looking to diversify their holdings

Limited expansion of Section 1042 tax deferral

Current tax law allows a business owner to sell their corporation’s stock to an ESOP and defer 100 percent of their capital gains if the following requirements are met:

  • The ESOP must own 30 percent or more of the corporation’s stock after the sale;
  • The selling shareholder must reinvest their proceeds in stocks and bonds of U.S. operating companies (commonly referred to as Qualified Replacement Property); AND
  • The company sold to the ESOP must be a C corporation at the time of the transaction.

The SECURE Act 2.0 includes a modest expansion of Section 1042 so that it now applies to the sale of S corporation stock in addition to C corporations. The Act allows a selling shareholder electing Section 1042 to defer gain on up to 10 percent of their sales proceeds when selling S corporation stock to an ESOP. These provisions apply to transactions occurring after December 31, 2027.

Worker Ownership, Readiness, and Knowledge (“WORK”) Act

The WORK Act provides the DOL $50 million of funding over a five year period to create an Employee Ownership Initiative within the department. The aim is to promote employee ownership by providing grants to improve employee education, coordinating state employee ownership outreach programs, and developing best practices for employee-owned companies.

Standardized fair market valuation guidance

The WORK Act also directs the DOL to develop “acceptable standards and procedures to establish good faith fair market value for shares of a business to be acquired by an employee stock ownership plan.” This has been a long sought-after request in the ESOP community.

Amended definition of “publicly traded” for diversification

The SECURE 2.0 Act amends the diversification provisions of IRC Section 401 for plan years starting after December 31, 2027. Employer securities will now be treated as “publicly traded” for diversification purposes, provided they:

  • Are subject to price quotations by at least four dealers on an SEC regulated interdealer quotation system
  • Are not penny stocks
  • Are not issued by a shell company, a blank check company, or a company subject to bankruptcy proceedings
  • Have a public float with fair market value of at least $1 million and which constitutes at least 10 percent of outstanding shares

The Secure 2.0 Act contains some welcome provisions for ESOPs and is hopefully an indicator of future favorable legislation. If you have any questions about the Act’s provisions, or would like to discuss your company’s ESOP needs, please contact your Kreischer Miller relationship director or any member of our ESOP Services group.

You may also like:

Contact the Author

Andrew R. Berger, CPA

Andrew R. Berger, CPA

Director, Tax Strategies

ESOPs Specialist, Business Tax Specialist, Individual Tax Specialist

Contact Us

We invite you to connect with us to discuss your needs and learn more about the Kreischer Miller difference.
Contact Us
You are using an unsupported version of Internet Explorer. To ensure security, performance, and full functionality, please upgrade to an up-to-date browser.