Employee stock ownership plans (ESOPs) can be a powerful tool for recruiting and retaining top talent in good times and bad. And there is ample research showing that ESOP companies weather economic crises better than non-ESOP businesses.
Those advantages helped drive peak interest in ESOP conversions just before the coronavirus that causes COVID-19 hit. Although dealing with the pandemic takes priority now, there are still strong reasons to consider an ESOP for long-term stability.
For instance, researchers from Rutgers University and the University of Massachusetts Amherst found that publicly traded ESOP companies were more likely to survive a recession and maintain steady employment levels in both boom and bust cycles.
Similarly, researchers at Georgetown University’s McDonough School of Business who studied ESOPs formed as S corporations found that during the U.S. recession that began in December 2007, these ESOPs, on average, continued to hire when other firms laid off workers; invested in their businesses when other firms were in retreat; and expanded their contributions to employee retirement plans when other firms were doing the opposite.
ESOP Considerations During the Pandemic
The COVID-19 pandemic may have distinct impact on ESOP businesses, especially when they are downsizing.
“ESOP sponsors need to appreciate the extent of the financial strain imposed on their company by a simultaneous layoff of a sizable portion of their workforce,” Harvey M. Katz, a partner at law firm Fox Rothschild in New York City, wrote recently. “Each one of these terminated employees will receive a distribution of shares from the plan at the same time and therefore will become eligible to ‘cash-out’ all or part of those shares concurrently.”
That would result in “a spike of cash-out requests by a significant number of employees—at a time when the company is least able to afford to make these payments,” Katz noted.
Like other businesses, however, the Coronavirus Aid, Relief, and Economic Security (CARES) Act offers ESOP-owned companies much-needed assistance.
ESOP companies can now apply for and take out a Small Business Administration loan under the new Paycheck Protection Program (PPP) to cover payroll costs and other approved expenses, explained Christopher McLean, an attorney with Kaufman & Canoles in Norfolk, Va. ESOP companies can then use PPP loans to cover both ESOP contributions and 401(k) plan contributions, he pointed out.
In calculating the ceiling on PPP loan amounts, attorneys at Morrison Cohen in New York City advised, “companies that have paid cash contributions into their ESOPs during the measuring period (calendar 2019 for most employers) should remember to include [these contributions] in the calculation of ‘payroll costs’ in their loan applications.”
Two nonprofit organizations, the ESOP Association and the National Center for Employee Ownership, offer resources for ESOP companies on applying for PPP loans and can provide advice on issues such as managing ESOP contributions when cash flow is reduced.