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Suggest questionThe Secure 2.0 Act of 2022 makes some interesting developments in the world of ESOPs. John Burgess and I work through categorically how this new legislation will affect ESOPs now and into the future. We touch on its changes for 1042, tax credits, ESOP education, and ESOP plan design. Overall this legislation provides more reassurance that ESOPs have bipartisan support and are only becoming a stronger part of the US economy.
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<p><!--block-->[0:10] Everybody Welcome this is the theesopguy and we are on a journey to an ESOP and today we have the awesome opportunity. <br> Disgust secure 2.0 which if you have not heard about it this is the recent legislation that was passed last year. <br> And it definitely affects all qualified benefit plans but it definitely affects Aesop's in, to do that we have invited John Burgess who is an ESOP attorney out of Tampa. <br> To really kind of walk us through some of the changes are some of the things that the secure 2.0. <br> Will bring about and so that we all can kind of better understand what's going on so with all that I just wanted to kind of Welcome John back to the podcast this is his second time on the podcast I think right John. <br> <br> [0:57] That's the second yeah good to be that great thank you thank you for coming so kind of in general let's just kind of go right into what this is all about so when we. <br> When they had passed the secure secure 2.0 first off just give us kind of an overview of what the legislative part of this is in terms of Congress and what they're trying to do with this this type of legislation. <br> <br> [1:21] Pure well. <br> In the Genesis of this and secure 1.0 which was passed back in 2019 was really getting access for more people to retirement plans. <br> One of the big issues that we have in this country I think everybody is aware this is the fact that people just aren't saving enough for retirement. <br> It's not like the old days in the 60s and 70s when employers were sponsoring defined benefit plans which. <br> Wow bunch of money in the plan and then you would get a specific annuity every year and the employer would entirely fund that now we're on more of a 401 k system where your get your actually having to put money away in the employer sometimes we'll match it or they'll sometimes put contributions in there. <br> <br> [1:59] So we've understood for a long time that there's a big problem with retirement Readiness and so in 2019 Congress first de tried tried to address this issue with secure 1.0, this is passed right at the end of 2019 and of course a few months after that covid happened and so it was a it was obviously a big deal in the retirement industry but it really didn't get a lot of attention that I probably deserve because Kobe took everything over. <br> So there are a lot of great things in that really again just expanding access to retirement plans giving employers more options giving them incentives to start and maintain plans. <br> And so they wanted to build on that and so we have secure 2.0 which was passed as part of the Consolidated Appropriations Act of 2022 which was signed back in December. <br> <br> [2:41] So really a lot of this is just taking on what started insecure 1.0 building upon it. <br> <br> [2:47] Giving more incentives giving more opportunities for employers to expand on their retirement plans and make sure that they're up there and people have access to these things. <br> So it's a process there are a lot of things that we were most of this is really geared towards things like 401 k plans and so there's a lot of stuff in the act that we're not going to talk about here because we're focusing on esops. <br> <br> [3:07] But, that those things are out there but when you look through the app there are a few specific Provisions that go to esops and then there are much of things that also affect all qualified retirement plans and we all know, qualified retirement plans include esops so there is good in it be an impact on that and we'll talk about a little bit I did the spin of how they impact Aesop's versus how they might affect other types of plans like 401 K's at the good news with all this I think it continues to reveal the, and I get this question from people all the time it reveals that, both Republican side and the Democratic side definitely like Aesop's and so sometimes people like hey because an ESOP, is a legislative vehicle will it ever be legislated out of out of Congress someday and I always tell people I don't think so because it's got such a great support on both sides and this just reveals that they actually cuz there are specific things in here we'll talk about that, Congress definitely likes esops and its really good for everybody it's good for anybody that's thinking about an ESOP long-term it's good for the existing ESOP companies so, so with all that it's just it's really going to be I think very positive to get into what's going on so what do you want to start with today John on terms of understanding secure 2.0. <br> <br> [4:21] Sure so let's talk about the thing that we've been looking for an ESOP Community for ages and ages and Ages which is extending 10:42 to s-corporations. <br> And 1042 if you're not familiar is a provision in the tax code. <br> That allows you to defer any capital gains you you have on the sale of your stock to an ESOP have to have to be C corporation ESOP has to own at least 30 percent of the stock once you get out of that. <br> <br> [4:49] But it's always only apply to C corporations, and a lot of companies that we work with as we're establishing Aesop's or s-corporation so what they would have to do is they would have to revert their tax status from S Corp to seek or before they actually did the ESOP transaction, some people are willing to do it some people just don't want to deal with it, because it does make the corporation taxable for five years because you're not once you revoke your us election you're not allowed to like back into status until five years after that so this is something and it applies on a limited basis it's only going to apply to, initially 10% of any gain that you would recognize if your company is an s-corporation, and this thing doesn't even kick in until 2028 so we've got a ways to go before this this happens but you know Phil I know that is you're working with. <br> <br> [5:39] Especially with that's Corporation they're looking for ways to minimize their taxes as a transaction happens, so this may be a small way to get there but I think that once we now that we have this in the tax code the hope is that that ten percent number is going to start to increase over time and maybe we'll never get to 100% because the the escort. <br> <br> [5:58] 100% Aesop's dialysis is so great and it's essentially the first invoice taxes on all all earnings of the corporation going forward but this is at least a foot in the door so it is a positive development that we've been hoping to get for years, yeah I'd agree and as we talk about the 10:42 and we can't do a whole episode on this but. <br> Essentially what we have right now before we get to 20 28 is you're going to choose when you're planning your ESOP, you're going to choose to be an S corp or C Corp and it's usually the idea behind this is that you can't have your cake and eat it too so to speak so if I'm an s-corporation then the company itself will become tax exempt. <br> But I can't use. <br> As an s-corporation I can't use the 1040 to capital gains deferral so the selling shareholder has to pay the capital gains taxes on that transaction. <br> <br> [6:48] If I'm existing C Corp then I can use the 10:42 and then maybe flip it to an s. <br> You know if I can if the rules allow me to do that so then I can have both of those but most time the people that were talking to companies are existing as corporations and it's just not even on the table. <br> What I like about what they put in here if I think you know really positively is kind of what you said is that this gives us a foot in the door. <br> To expand s-corporation benefits that aren't on the table right now so we do have to wait for. <br> You know say for five years to move this but one of the examples I was thinking about was if you say say you have you know a ten million dollar transaction. <br> <br> [7:32] Well I can use, ten percent of that when I get there I can use ten percent that's a million dollars that I could put and defer in capital gains so that's still a substantial piece of you know that you can work with, to start absorbing some of the capital gains costs that aren't available so I think either way, it's going to be it's going in the right direction to wear it someday maybe we do have a lot more benefits for both you know for an s-corporation so we don't have to do, the flip now, the flip basically is if I must S corporation and I have and I really want to use 10:42 then I'm going to give up my spine is Corporation status for five years, and the ESOP C corporation is going to pay taxes for five years in order for them to get that, 10:42 exemption so that's just that's just kind of some background on it and I do think it's definitely going in the right direction, and then politically there's there's there's an opportunity now to expand on it and and I think it's taken years from this thing's been going before Congress forever right on the 10:42 means we didn't get all right escorts authorized to oh nice Ops until or become Aesop's until I think it was 1998 yeah so in 1040 to spin around I think longer than that so this is always been something that we've you know we've been looking to get, get our foot in the door like I said so now that we've got it there now it's just a matter of how much can we expand This and like we mentioned before with secure 2.0 and especially with esops in general. <br> <br> [8:58] We know that there is Broad support politically you know in both parties you know you have people, around the Reagan was talking about this in the 80s when he was president and on the flip side you had Bernie Sanders who's really big proponent of Aesop's to so you got pretty much both both sides of the spectrum there were supportive of these things so. <br> It is good that we have this in obviously we'd like to see more we'd like to see more benefits but you know just a couple of. <br> <br> [9:24] Couple of points about flipping from an S corp to a c-corp if you do do it in an ESOP transaction. <br> You know one of the things that you do in feasibility is you look at okay if we do the the flip to the C Corp how much is it going to cost us a taxes, you think about the fact that the company is going to have a lot more in interest deductions between any bank loans or any seller findings that financing that's out there plus the ESOP contributions. <br> Typically from from most of the transactions of I've worked on where we've looked at this it's really not that big of a deal and then we're also going to talk a little bit about tax credits, that are going to be available for for smaller esops has in the new legislation and that can really make the the impact of going from s to see even less of an issue for people so you know we're when you do good. <br> <br> [10:15] Yeah and I guess one more point to is that with us corpse you know the tax basis of the shareholder of an S corp goes up as earnings accumulate and they get taxed on those so typically you know just looking at things you know on a level basis. <br> 10:42 probably isn't going to be as big of a deal for most S Corp shareholders than it would be for a c-corp shareholder where their base is just stays the same the whole time yeah but you know any benefit that we can have an any incentive that we can have in order to get people to convert over to an ESOP, the batter so this is definitely going in the right direction I think that's that's a good point when you do and that's why when we do feasibility we do look at s and see side by side to see what. <br> <br> [10:56] The differences would be when you do look at S corporation tax basis shareholders. <br> There's a thing called AAA and it does help to kind of mitigate the risk or not the risk to kind of reduce the overall taxes on an S corp so sometimes it's a big deal sometimes it's not a big deal because sometimes. <br> Some companies don't accumulate that basis because of the way they distribute cash out, any way we can get into that too deeply as well I know we love talking about you know those parts of it getting into the next thing I think we want to get into kind of the valuation side in terms of how, this act is. <br> <br> [11:34] I guess giving the Department of Labor some direction on helping everybody to determine the way the value of business and an ESOP is that kind of the next part of it, yeah that's that's a big deal that we've been look again one of those things that we've been looking for in the ESOP Community for years because the deal well of course has been very active in investigating Aesop's they look at a lot of ESOP transactions and of course the big issue they're looking for is. <br> Did the ESOP over pay for the stock that it purchased from the selling shareholders. <br> And so there's been a lot of ambiguity and there's not real been a real good set of clear standards that the DOL has has given us that says hey this is what you need to look at when you're performing a valuation. <br> You know we do have those process agreements that are out there great Bank was the first one this you know goes back probably. <br> I think a good seven or eight years maybe even actually longer than that. <br> <br> [12:27] So there are you know a few guidelines in place but those aren't really binding on anybody they only apply to the companies that are there out there that have those I think they're about half a dozen of them right now. <br> But the Security Act is did have secure 2.0 actually had some language in there that said that DOL, you guys have got to straighten this out people are asking for these standards in order to make this work and really make make people more comfortable with doing esops you need to give us a set of valuation standards and so, they didn't really say much about what those standards would be they just said to the DOL you guys are gonna go out and do this and so hopefully we'll see some of those standards sooner than later it's good to point out go into that a little bit for people that don't really understand esops yet it's the point I want to make is that the way the valuation is. <br> <br> [13:17] I guess established it is an arm's length transaction and the sell-side basically establishes what they believe they're going to sell the company for they're going to make eventually they're going to make an offer to a trustee, the trustee is going to have an independent valuation Firm support them and then they're going to make an offer a counteroffer to the offer and so what's happening right now as it goes back and forth. <br> Now there's primarily the main method of valuing a business under an ESOP I would say is going to going to be weighted towards the discounted cash flow. <br> Which is an income approach method that looks at normalized cash flow forecasted in the future being present valued back now, there's some weight put on the market approach and then there's some weight put on the historical capitalization of earnings approach. <br> <br> [14:03] We're always going to look at the balance sheet and look at the net asset values as well so it'll be interesting for me just to see what they come up with because I think the industry itself for the. <br> You know whatever 10-20 years has come up with a method that the trustees are comfortable with. <br> And the cell sides are comfortable with and then those have been challenged by you know any kind of. <br> <br> [14:26] Cases against an existing ESOP so I think there's been some level of understanding of it so it'll be interesting to see what the Department of Labor does with this part of the section of the security point I mean the deal well the good news I guess for us is that The Dol has lost a few cases recently so things are starting to Trend back in the in the right direction, but you know they're going to be active and just even if the if you do through go through an investigation the dll says okay yeah you guys are good that's still a lot of time and a lot of money and a lot of resources that are directed towards dealing with that investigation as opposed to, running your business and and you know for us trying to work on other ESOP transaction so yeah hopefully that guidance will help us out and give everybody, a clear set of playing rules to to be under and understand exactly what we need to do. <br> <br> [15:14] Hopefully it is the Department of Labor so so so but will be excited to see so the next thing we want to talk about I guess I'll just kind of like let you kind of go into it but there's definitely some. <br> Awareness this topic is really about the awareness of Aesop's and one thing that both John and I because we're both in Florida we notice is that, there's still a lot of people that just basically don't understand Aesop's and so there's a there's a need for more education just like this podcast and and, you know certain states have really geared up for this and other states maybe have it so talk let's talk a little bit about the funding towards that and what that looks like for other, States as well from Congress yeah I mean you you hit the nail on the head that's really what this podcast is all about is educating people because. <br> I think all of us in the ESOP world will tell you that one of the biggest obstacles that we have if not the biggest obstacle, towards that there's stopping the creation of more Aesop's is the fact that just people don't know about them or maybe they know some things that aren't entirely accurate or even close to accurate. <br> <br> [16:17] So you know one thing I've been active with is the Florida Center for employee ownership which we started back in 2020 which is a state-level resource like the nce oh, they are that is out there just to spread the word and give people honest real education help them understand the facts not you know go into any sort of hyperbole or, try to sell them something that may not work for them but you know it obviously with these types of things it's always difficult to get funding. <br> So the the ACT does authorize The Dol to essentially set up a system where they're going to distribute money to you know, the state's it could be the state's enters it could be something new that the state itself establishes but the point is there's going to be more resources out there towards getting education people. <br> And so it's going to start in the government's fiscal year ending in 2025 there the school year on September 30th so, first year in 2025 is going to start with four million and it's going to grow to 16 million over time up to 20 29 then after that it's not funded but hopefully of course with the support of Aesop's that we have out there in in both parties, we'll be able to continue that funding into the future. <br> <br> [17:29] They really want that funding to go out there to do exactly what you know our state center and the other State Centers across the country are doing. <br> Which is to get the word out to people do things like put on programming talk to business owners talk to other professionals who. <br> You know are working with business owners. <br> <br> [17:48] One thing that we've discovered over the past three years with the Florida Center is that trying to reach business owners directly isn't always the best approach it's reaching the people who work with the business owners every day so people like Bankers CPAs other types of attorneys, if we can get this into their head because they're probably talking to their clients about succession planning and what am I going to do with this business when I retire, if we can get those people to plant the seed in the business owners head, and they start to learn more and they want to get some education themselves that's really I think the best way for us to really make the spread a lot better than it has in the past I think you hit on a good point that. <br> And I'm really glad about this because I do think there's a couple things I think about. <br> The this is where I believe the government should be involved in the world right I mean there's some things that they do then I'm like I don't even know why you're doing you're involved in that. <br> But not to get political but but the point is is that this helps the whole community and this helps create jobs this helps retain jobs. <br> There's so many different aspects of this this helps transfer wealth I mean there's a million different things that are both that are going to help the whole you know I guess from the standpoint of, of bettering the world and the United States that I believe are really important, the thing I wanted to kind of hone in on is is it that the thing you hit on like the advisors like this is take the CPAs for for a second the of course the attorneys. <br> <br> [19:16] Um the bankers the people that actually have by advisor companies even insurance agents right I mean even yeah you know I hate to kind of like you know say that in a way that's demeaning to them but I mean they're all there and people companies are always asking them that it should even think about an ESOP. <br> And if the first words out of their mouth are you know no because it's too expensive or know it's it's too complicated and you know it who knows if it's if it's going to be the option for them but it should at least be considered. <br> <br> [19:47] Because it's such a great option and so I love that that those the advisors just need to know and so sometimes they're just not comfortable with it I know that you and I are talking to at the FI CPA this year right we've got some kind of right speaking engagement and then I've got one for the local fic PA so certainly the CPAs definitely are in that ballpark of better understanding it so they can feel more comfortable. <br> <br> [20:12] One thing I've dealt with just in the educational side and this is and this is why I'm glad that governments funding this is because I think in the private side. <br> The a lot of the information people are getting about Aesop's is. <br> You know just coming from sources that are very large institutions that are that create a very expensive ESOP transaction. <br> And so when we think about the the idea then just walking away from one of the conference's now kind of working through debriefing some of this but sometimes people get the idea that that's the only way you can do it like the structure of an investment banking firm forming an ESOP. <br> And that's just not true and so what I'm really hoping for out of this is that there's a well-balanced holistic education. <br> That this is available to somebody and they can evaluate that option and then this other options available to I think what's happening right now because it's difficult for people to get all the information out. <br> The right way is that they think it's the only way is this way and then now it's not even an option so I think the cost of an ESOP are not being fully, you know debriefed by by companies that maybe become Aesop's and I think honestly for me resources wise I just want people to know that this is a great option so that's one of the things I'm excited about. <br> <br> [21:33] Yeah that's one of the things that I always emphasize when I talk to people about esops is that they're so flexible you can do them you know a million different ways I mean. <br> <br> [21:41] One thing that blows a lot of people's minds when I tell them this is yeah you can do just 30 percent or 40 percent up front you don't have to sell the entire business, and we've done a bunch of transactions like that and you know maybe the owner doesn't want to totally step away but they at least want to liquidate some of their interest in the company they want to start diversifying their, their Holdings for their retirement. <br> <br> [22:02] You can do that with any sock you probably can't do that where you know some outside buyer comes in to do it so just the fact that we can get that out to people, and this will give us more recent resources did to do it I think it's going to be money real well spent by the government yep for sure so they're going to specifically they're going to release four million dollars is that what it is and then you said it's going to be 4 million for the fiscal year ending September 30th 2025 so that doesn't technically start until October 1st of next year so this isn't going to kick in right away but then it's going to increase over time it'll get to 16 million for the 2029 fiscal year, and then after that we've got a got to get them to reauthorize more funding yeah just got to keep you know and there is an effort of continually lobbying I mean obviously there's a lot of efforts between. <br> The esca people which I we've interviewed them I know the ESOP Association is pretty. <br> Is pretty busy doing some lobbying I know there's a lot of volunteers that go to Washington you know in the ESOP professional community and so all of that. <br> <br> [23:02] Is years and years of work so what we're seeing right now is years and years of people just laboring in Washington and talking about the ESOP so, yeah you know there's a lot of Decades of work that have gone behind a lot of these things you know that the 10:42 40s corpse that's been something we've been hammering for years and years and years, and now this funding is going to be a really great way to do that along with the course near the valuation standards people have been asking for that for year so now it's in the dlls hand so at least we've got some push for them to do that but yeah I mean can't ignore the fact that this is this is something that people have really been working on for a long time so definitely want to recognize them. <br> <br> [23:40] So going into the next topic I think what we want to kind of make sure that people understand this because again this is POD this podcast is really about brand-new Aesop's or companies that are just getting into that like I'm thinking of doing an ESOP. <br> So the concept here is that there are issues as the ESOP gets created that will require the company to be paying people out eventually and that's called repurchase liability. <br> And so this part of the ACT is called as part of how that is going to be managed better and so kind of teeing that up to say. <br> Explain that a little bit in terms of how they secure 2.0 will help companies with Cashing Out people. <br> <br> [24:21] Right and this is a provision that applies to all qualified plans so this is going to impact 401K plans cash balance defined benefit plan so this is not something that was specifically geared towards Aesop's but we'll talk about how the impact of this is really important for esops but, the tax code has some language in there that says that if you leave a company and your vested balance is under a certain threshold, the company can essentially just kick you out of the plan and the plan will be written to say this, and you'll just receive your funds if you know if the amount is over a thousand dollars and you don't make any election as far as how you want to receive it you'll get it rolled over into an IRA that the company sets up so bright now the or I guess Prix secure 2.0 that limit was five thousand dollars so, if your account balance in the plan was over five thousand dollars the participant had to consent in order to receive that distribution you can't just kick them out for for 2024 and after that, they've increased the limit to seven thousand dollars so a couple thousand more where you can essentially kick somebody out of the plan so that helps in a couple of ways you know number one one big issue with the DOL and all types qualified plans is not just Aesop's but it's. <br> <br> [25:37] Finding people who left the company and they're missing and you don't know where they went to, DOL really hits that issue hard when they when they investigate a plan so they want to make sure you have a good process in place and and that you're doing what you can in order to track these people down and make sure that they get your benefits out of their benefits out of the plan. <br> <br> [25:56] So they'll give you opportunity to essentially get more people out that maybe you don't have to keep track of. <br> Second thing we're why this helps for all types of plans is that a lot of record Keepers and probably most of them. <br> Do you charge plan sponsors on a per participant fee so if you can get more people on the plan that's going to reduce that fee again 401k's Aesop's all the same thing but with isak is really important because of the repurchase liability. <br> And esops on like 401 k plans don't really have liquid assets in them you know with. <br> <br> [26:29] With a 401k plan it's easy to liquidate a mutual fund and pay somebody out cash that's that's not hard to do with an ESOP the company has come up with the cash in some sort of way because typically with most Aesop's you're not kicking the stock out to them when you make a distribution you're putting cash in the plan or your Redeeming the shares through the company so you've got to make sure they have that cash flow so with most Aesop's as they start to grow and they start to mature. <br> <br> [26:55] The value of the stock is going to grow and get bigger because you're doing things like repaying debt down probably saving on some taxes if you're an escort be sock and, that value of that stock if it maybe its let's say six thousand dollars from somebody leaves, that can grow really quickly over the next few years they can get up to you know ten or twelve thousand in just the course of a few years ago because of those factors were talking about, so to the extent that you can get more people out of the planet cash them out sooner that's going to be better long-term towards your repurchase liability so this is definitely something that Aesop's in particular should not Overlook and in and I would, the plans that I work with once this comes into effect in 2024 I'm definitely going to say. <br> We need to make changes to the plan in order to do this because if you if you let us do you know these amounts day in the plan and you're not. <br> <br> [27:45] You know sometimes you can manage this by. <br> Five essentially reshuffling or passing out there their accounts and taking them out of stock if you've done that why not just move that from the planet Eire, yeah and so this is something I hope people are going to take advantage of because I think it's going to be a real big key in in that repurchase liability. <br> Yeah so when you when you say kicking someone out let's just kind of like, also talked about like these are the people that have left the company right they've right they've been terminated or yeah so it's not like you're it's not like you're sitting around saying we you know and, ESOP culture 101 right we're not just going to get rid of people so that we can create less repurchase liability so. <br> But someone sitting around for they're not employed with the company anymore and they're holding onto their participant stock. <br> Is going to have more appreciation of value and that's going to dilute the existing employees and then create more right purchase liability. <br> So and so so good good point and I think that overall. <br> Managing repurchase liability just to kind of point that out is something that first off I always tell people don't get freaked out about that I mean it's it's. <br> <br> [28:58] You know if you create the ESOP plan correctly. <br> The first part of the the season of life of an ESOP company is paying your debt off so you have a little leverage that's getting created and the buyout. <br> <br> [29:10] And you're going to have the you're going to be enabled and supported by the IRS subsidy which is an S corp ESOP or even the benefits of being a c-corp and so you're going to have additional cash flow to pay that debt off. <br> And then most of the time as that kind of Trends down. <br> The company will eventually start having repurchased liability but because the company will also be building up excess cash reserves as well typically if they're a profitable company, because once they do pay off the debt then the company's cash is really there to then now serve the the future participants in paying off debt so all of that and good planning will work out you know the way it's going to now what we're talking about in this is, it just gives people some more tools so in what John can do then is go back and I'm assuming you have to go amend the plan write the existing site plan. <br> <br> [30:01] So in a plan document when you first start the ESOP will have the requirements that we have right now under law and then what John would have to do is just kind of amend the plan get everybody to sign off on it I'm assuming the trustee has to sign off on the. <br> <br> [30:15] Well not necessarily because the trustee really is not the plan sponsor oh that's right yeah that type of that type of change is a plan Sponsor Change it's not a fiduciary thing so you're not having to worry about your fiduciary duties that's strictly a, plan design type of decision so the trustee wouldn't have to sign off on it and it wouldn't be a fiduciary call okay. <br> Now that I think it's just something that really helps in general and I know it applies to 40 and case but this this this is all about Aesop's oh. <br> All right so as we go into the next thing you know first off people always get confused when we say tax credits as a CPA firm you know. <br> Credit versus a deduction talk let's talk a little bit about that support you know in terms of the intention of this part of secure 2.0 is being a credit to the company right. <br> <br> [31:03] Right Brent yeah so you know tax credits are better than tax deductions because tax credit is dollar-for-dollar reduction of your income taxes. <br> <br> [31:11] Deduction gets you. <br> The amount of the deduction times whatever your marginal rate is so just because we're talking about corporations here maximum corporate rate right now for see corpse I think is 21% so, hundred dollar credit or a hundred dollar deduction gets you basically $21 off your tax bill so tax credits are better than deductions but, but the tax credits that we're talking about here and this really goes back to secure 1.0 because that's where the started but again the incentive here is for employers to start new plans they wanted people to get 401K plans up and up and running. <br> <br> [31:47] And to the extent that you don't have a plan before that you can qualify for a tax credit here so. <br> Going back to secure 1.0 the original the original credit allowed an employer to get a tax credit of up to 50% of there. <br> Of their startup costs for any for printing new planet they established. <br> Yeah and if you are between 50 and 100 employees at 50% number would would only get phase down but, you know fifty fifty percent of your startup costs is still a pretty good tax credit when you're when you're looking to start a plan so when you start up a plan you've got to you know hire a plan administrator got to get Communications out you've got to get people enrolled and, that's definitely something that's been an incentive so what Congress didn't secure 2.0 was take that and, number one they added on to that credit but then they created a new credit which I think is going to be even more helpful to people so let's talk about the the expansion of the start of credit. <br> <br> [32:48] Now it's going to be if you're under 50 employees it's going to be a hundred percent of your startup costs can be taken as a tax credit, and if you're between 50 and 50 and 100 employees that gets face down 50%. <br> So again you know you've got an incentive there to to start up a plan this will help you pay for the for the cost. <br> There is a cap on this this didn't change from secure 1.0 to 2.0, but it's a maximum of 5,000 dollars a year for the first three years and then after the first three years of the credit goes away so that's one thing that people can do in order to help. <br> <br> [33:26] Offset the cost of starting of a plan. <br> And you can't take this credit if you already have a qualified plan in existence so for example if you're a company that's looking to do an ESOP and you already have a 401k plan in place you're not going to qualify for the nose but if the ESOP is your first type of qualified plan. <br> Then you are going to qualify for it mmm yeah which is going to limit a lot of companies to be honest yeah a lot of companies have for own case yeah yeah. <br> <br> [33:52] So then the second part of this is entirely new and again this only applies if you if you don't have a plan in place so if you're looking to do an ESOP and you've already got a 401 k you're not going to get this. <br> But it's another tax credit. <br> <br> [34:06] That is going to help you offset the cost of your employer contributions to the plant so you know where the 401 k plan typically we're talking about matching contributions. <br> <br> [34:15] In some some other types of plans maybe there will be a profit-sharing contribution, but remember that ESOP ESOP loan repayments and the contribution that the employer makes into in to help pay off the inside ESOP note, that is employer contribution for you know for retirement plan purposes so that contribution is going to qualify under this okay and what it does is that allows the employer tax credit for the first five years of the plans existence. <br> And there's a per employee cap of a thousand dollars per person so if you're contributing a thousand dollars per person to to their account. <br> Then in the first two years you're going to get 100% of that as a tax credit and then over the next three years or in years 3 4 & 5 that's going to get phase down to 75 50 and 25 percent. <br> But you're going to get at least some sort of credit for that for the first five years again there is a phase out of this credit once you go from 50 to 100 employees so you're not going to get quite as much, but at least you know every little tax credit we can get is good but it does help you with with offsetting some of the costs of the plan and making those contributions in there. <br> Yeah especially with the credits for the company's coming and to an ESOP transaction they're going to be in debt because they're paying off the the shareholders. <br> The existing selling shareholders loan but you have first off you have to repeat that you can't have had a 401k plan prior to. <br> <br> [35:44] Example yeah right and yeah this has to be your first qualified plan as an opiate in order and this and I can honestly here that people asking me this question so I'm just going to ask it. <br> What if I shut my 401k down a year before I start my ESOP. <br> <br> [35:58] That still doesn't work I know you have Cactus I think it I think that the the threshold is three years so three hours planned 401k plan like five years ago and you shot it down then then it would work but anything within the last three years your outlook. <br> Government knows so let's just say they do qualify to just to repeat the benefit of this so if I have. <br> The equivalent of a thousand dollars of shares going into their accounts. <br> <br> [36:24] For each participant and I have each so I get up to a thousand dollars of credit for each participant so if I have 50 employees. <br> <br> [36:34] And they each get on average of a thousand bucks that could be fifty thousand dollars. <br> Of credit right for the first for the first two years and for two years the next three years it gets face down so you're not getting quite as much but you're still getting it pretty now that's not yeah it's not bad the to the so in the world of Aesop's what that looks like is that you have, the value of the stock is is built around the inside note which is basically the value of the, the amount of the payment that's going to be made each year out to to kind of trigger the, release of shares which is the allocation of the stock so so that amount whatever that is. <br> Is going to be equivalent for it's going to be broken down by each employee right basically is what I'm getting right yeah right yeah. <br> <br> [37:19] And before we leave this topic let's pay off the keys that I had in the 10:42 and the escorts and we're talking about before. <br> Remember that if you're 100% escort besought these tax credits really don't do anything for you because you're not subject to taxes anyway so it's not going to matter it's good point yeah but if but if it is you know let's see a partially owned escort theesopguy. <br> The other selling shareholders are still going to be subject to taxes so they'll be able to take advantage of that tax credit you know that to the extent that that is allocated to their shares, of course with see corpse that that's always going to be an impact so if you do that s2c conversion I'm sorry yes to see conversion. <br> Then you're going to again this may help out with some of those taxes that you would have for the first five years if you decided to do that because you wanted to take full advantage of 1042 so so yeah it. <br> <br> [38:11] May not impact all S Corp Aesop's or I'll seek or psaps and again if you're under over 100 employees this is going to get phased out for you so again it's going to be one of the things that plays into the feasibility and the S Corp for this first to see corpse. <br> <br> [38:27] But this is effective right away so you can start taking advantage of this in 2023 so the extent that we set up new Aesop's back in back at. <br> At the end of last year wouldn't this credit wouldn't apply to last year but it would start applying to this year so there's a lot of ways to take advantage of this. <br> <br> [38:47] And so and I think that kind of as we get into the final part of this podcast is it that brings to light the main one of the things I want to always say to everybody is that. <br> These types of things they need to be understood really well by your ESOP advisor who those people are. <br> And so a lot of times like who should you choose while chew somebody you know this is one of the things you can be asking in your, your questions like do you understand then the new secure 2.0 and how that would affect our ESOP I mean that would be a good question to ask you know any of advisers that you're interviewing, what happens is you're going to want to align yourself with people that understand how to use these tools and so kind of looking at that of course. <br> John being an ESOP attorney and be able to come to the table to help plan an ESOP and be able to say hey what have you thought about this if you thought about that that's a critical element you know the like he said we're not going to use all these tools for every single scenario. <br> But we want to know as you start looking at the case you know of a company are we in Sr we see what applies and you know obviously the old rules with the new rules what's the best way to structure the ESOP. <br> <br> [40:01] You know you if you don't take advantage of these and they're available to you it's just kind of it's just poor planning so my big thing here is is choose advisors to really understand these types of things and and in the world of Aesop's, normally it's like that professional is primarily just doing ESOP work would you agree with that. <br> <br> [40:19] Yeah totally hating one of the things that is you're saying that that entered my mind was. <br> <br> [40:25] The 401 k Market these days has become so commoditized and I mean it's a race to the bottom with fees it's you know everything pretty much look the same as everything else. <br> With these apps you can't really do that you know you need to look at a specific company situation you need to look at the selling shareholders goals, need to look at the company itself you need to look at his cash flow there just a million different factors out there and you need to work with people who have seen these things before who understand how the process works. <br> And who are going to be comfortable and helping guide you making these decisions and you know as we're implementing esops I mean you and I have seen it a bunch of times a lot of what we do along the way is education yeah you know if there's a lot of technical stuff to it but there's also a lot of. <br> Making them comfortable and helping them to understand it because you know with almost all of the owners we work with you know. <br> <br> [41:15] This is the first time they've done it you know we do a bunch of these every year but for them it's the one time and so you got it work with somebody who is comfortable and is good at helping you understand these types of things what factors important what's driving value. <br> You know all those all those things that are going to impact the company both before and after the transaction yeah and things like that John will do on an ongoing basis as. <br> You know you do the transaction but him being an ESOP attorney going forward you'd be able to like. <br> He's going to come back to those plans and help help his clients go through that so that's right you know whether the thing you know one of the things I love about just working in benefits and especially socks in general is that it's an ongoing relationship you know you coming you do the transaction but then you're there as they start to grow and they start to mature and they start to, deal with some of the issues that more mature esops deal with but it's great to get in there and be able to work with with business owners with companies and then ultimately the next generation of leadership so that you're there you're there for the ride with them and your part of their ESOP journey and that's really really cool it is cool. <br> Well good well John you were like so helpful you know and I started looking at the secure 2.0 I didn't want to try to do this on my own. <br> <br> [42:25] Thank you for being a just like dial into the things that are most important and I think there's, if anybody picks it up and starts reading it I think the idea here today was just let's highlight what's important for the ESOP. <br> And I think that was really well done so thank you so much for doing that for us today yeah thanks for having me there's a lot more stuff that we didn't cover it's just that you know those 400 something Pages legislation but you know again we want to make sure that the ESOP World understands what's important here and so it's always great to talk to you and get to get appear on this podcast, cool well thank you so with all that for everybody else just if you tune into this podcast and you want to know more go to the journey to an ESOP, dot-com and you'll find all the episodes there and, continue on your journey to an ESOP that's our biggest encouragement to you it's a great option for everybody if you do have questions please submit those into the website. <br> And from that just continue on your journey and thank you for listening today. </p>
About Journey to an ESOP & Beyond
ESOPs are gaining traction. In the "Journey to an ESOP & Beyond” podcast, Phillip Hayes explains the process of the ESOP transaction and addresses ESOPs from a business owner’s perspective. The "ESOP Guy" illuminates the simplicity of ESOPs as he debunks common misconceptions that ESOPs are immensely costly and complicated.
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