Jerry Ripperger
Stock Plan Services Consulting
The National Defense Authorization Act (NDAA) for Fiscal Year 2022 was recently signed into law. This comprehensive bill covers virtually every aspect of defense spending and operation and is typically a routine bill for Congress. You may be wondering what a defense bill has to do with ESOPs. Well, this year the bill includes a new section, Section 874, which impacts defense contractors that are owned by Employee Stock Ownership Plans (ESOPs).
Whether we choose to focus on thorns or roses is often influenced by who is telling the story. This isn’t limited to just flowers. It applies to stock services offered by employers as well.
Stock services come in a wide variety of forms including Employee Stock Ownership Plans (ESOPs), Long Term Incentive Plans (LTIPs), and Employee Stock Purchase Plans (ESPPs). The plans are designed to recruit, retain, reward, and retire employees.
An ESOP is a qualified defined contribution retirement plan that is invested primarily in the stock of the sponsoring company. An ESOP allows eligible employees to share in the success of the company that they work for through their retirement plan.
Section 874
The NDAA includes a provision that encourages the adoption of ESOPs by defense contractors by providing for the opportunity for the sponsoring company to get sole-source follow-on awards. A follow-on award allows a qualified contractor to provide products and services that are substantially the same for the Department of Defense (DoD) without the need for a competitive bid. This can provide greater stability for the DoD and the company providing the services.
Benefits for S Corporation ESOPs
This sole-source follow-on award is in addition to some of the tax benefits that ESOPS already receive. To participate the contractor must be an S Corporation that is 100% ESOP owned.
An S Corporation is a flow through entity. The earnings of the company flow through to the owners and are taxed at the individual tax rate. With an ESOP owned company, the owner is a nontaxable retirement plan trust for federal tax purposes. Many states also mirror this or provide similar tax treatment.
Many defense contractors currently enjoy the benefits of ESOP ownership. If your client is a DoD contractor, it may be time to see if it’s a fit for them as well.
You can find additional ESOP information at www.principal.com/esopbenefits. Reach out to your Principal® retirement representative to answer any questions you may have.
