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Home > Resources > ESOP > ESOPs Can Help Narrow Racial Wealth Gaps

ESOPs Can Help Narrow Racial Wealth Gaps

June 29, 2020 by Kevin Long

It is highly researched and widely known that too much of the country’s capital wealth is concentrated in the hands of too few. Furthermore, Black Americans face greater systemic barriers to building wealth beyond the need for a decent wage. Employee ownership in companies could, and should, lower these barriers. It is one of the most effective ways to provide access to capital wealth for employees while creating positive results for narrowing the wealth inequality gap. And Uncle Sam is willing to help pay for a substantial part of it. Try up to 60% of it!

Employee Stock Ownership Plans

Employee Stock Ownership Plans (ESOPs) are the most tax-efficient employee ownership model in the United States. Over 14 million employees are earning tax-subsidized equity through ESOPs. Employees earn a piece of their company, participating directly in its growth and success. ESOP employees earning less than $26,000 a year, on average, have more than double the retirement savings compared to similar workers nationally. Research from the National Center for Employee Ownership shows that “employee-owners of color have 30% higher income from wages, 79% greater net household wealth, and median tenure in their current job 36% over non-employee-owners of color.” 

Employees of all races are simply looking for opportunities to increase their wealth. ESOPs are not a handout. When an employee owns a piece of the action in the company, they are motivated to work harder to contribute to the success of the company. ESOP companies are proven to outperform their peers in their respective industries. ESOP employees earn their equity and make our economy stronger. It is even well documented that ESOP companies performed better than non-ESOP companies in the last recession. 

In the private sector, there is a lot of talk about companies fundamentally addressing racial inequality with their various programs and initiatives. Racial inequality is wealth inequality. You can’t address one without the other. You can change your hiring and your culture, but you must also offer real opportunities. Companies need to understand that programs, such as ESOPs subsidized with large tax incentives, are one of the best ways to help address these issues. Use tax-subsidized employee ownership in your company, enabling employees to build assets beyond their wages. The company will also profit from it. The hope is that this helps close some of the national wealth gaps.

Tax Benefits of ESOPs

The tax benefits of the modern ESOP were first enacted under the Ford administration when Congress allowed companies to make tax-deductible contributions to ESOPs and allow ESOPs to borrow money, paid back by the company in pre-tax dollars to buy company stock. From the start, ESOPs had broad bipartisan support. Ronald Reagan was a big advocate of the ESOP model, even before he became President. His administration added incentives to the tax code in 1984 to allow company owners to sell stock to an ESOP and defer the capital gain⁠—and in some cases, never pay it. Reagan believed that this helped preserve and perpetuate American companies. (Yes, he was right.) C corporations could also pay tax-deductible dividends into employees’ ESOP accounts! So employees increase performance and the company pays them a tax-deductible dividend with no payroll tax cost. 

To top this off, the Internal Revenue Code was amended in 1998 under the Clinton administration to allow S corporations to stream a percentage of their shareholder tax dollars into the employees’ ESOP accounts. Yes, actual tax dollars directly paying for benefits in employee accounts. If the ESOP owns 20% of the company, it gets 20% of the dollars that would otherwise be tax payments. 20% of your income tax cost funding your benefit plan. 100% ESOP? 100% tax-free, for-profit company. 

That is Federal policy promoting employee ownership through ESOPs. Bernie Sanders, the U.S. Catholic bishops, and Mark Cuban are among the many current fans of broad-based employee ownership. 

Let’s try to address the economic consequences of systemic racism in our country with employee-oriented benefit plans that help employees build equity and grow wealth. Let the Federal government help you do it. It will be good for your company, good for the economy, and most importantly help raise your employees up.

Learn more about ESOPs and the process for implementing on our website. In addition, the National Center for Employee Ownership is the greatest source of ESOP information in the country. Point your browsers to NCEO.org and their sister site ESOPinfo.org.

Filed Under: ESOP

About Kevin Long

Kevin has personally worked on every one of our 400 ESOP cases. Designing new ESOPs or assuring sustainability for existing ESOPs, he guides companies to achieve goals with their benefit plans in a tax-advantaged manner while incentivizing their employees to greater productivity.
Learn More About Kevin

EDITOR’S NOTE: We did the best we could to make sure the information and advice in this article were current as of the date of posting to the web site. Because the laws and the government’s rules are changing all the time, you should check with us if you are unsure whether this material is still current. Of course, none of our articles are meant to serve as specific legal advice to you. If you would like that, please call us at (916) 357-5660.

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