A Look Back at the Creation of S Corporation ESOPs and the Benefits They Provide for American Workers and the Economy

October 23, 2012

Home News A Look Back at the Creation of S Corporation ESOPs and the Benefits They Provide for American Workers and the Economy

Effective January 1, 1998, the U.S. Congress passed a law to enable U.S. employees to own Subchapter S companies where they work through an employee stock ownership plan (ESOP). In establishing S corporation ESOPs, Congress was careful to ensure that the benefits of this ownership structure were broad-based, not just for the executives.

An ESOP is a qualified defined contribution plan that provides a company’s workers with retirement savings through their investments in their employer’s stock, at no cost to the worker. Congress authorized the S corporation ESOP structure to encourage and expand retirement savings by giving American workers in all 50 states the opportunity to have equity in the companies where they work. Today, S corporation ESOPs are functioning in the way Congress intended them to do: creating jobs, generating economic activity and promoting retirement savings.

Data from a recent study by Alex Brill, tax advisor to the Simpson-Bowles deficit reduction commission, demonstrates the value S corporation ESOPs have for workers and the economy. The study analyzes data from 2001 to 2011 and finds that S ESOPs have created more jobs than other private sector businesses, significantly expanded the pool of U.S. workers who are saving for retirement, and boosted company productivity.

Further, a  2008 University of Pennsylvania/Wharton School of Business study found that S corporation ESOPs contribute $14 billion in new savings to their workers each year beyond the income they would otherwise have earned, and that S corporation ESOPs offer workers greater job stability and increased job satisfaction. The study also found that S corporation ESOPs’ higher productivity, profitability, job stability and job growth generate a collective $19 billion in economic value that otherwise would not exist.

These studies, along with the thousands of personal stories from employee-owners across the country, demonstrate how S ESOPs have had a positive impact on U.S. workers and the economy. The benefits of S corporation ESOPs are particularly important in light of the challenges Congress faces in addressing the current difficulties plaguing the American economy, working Americans, and their families.  Accordingly, it is important that Congress work to pass the “Promotion and Expansion of Private Employee Ownership Act” (H.R. 1244/S. 1512) in order to protect and expand employee ownership in S corporations and allow more working Americans the opportunity to become employee-owners.

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