Does the current DOL care what Congress thinks about ESOPs? Apparently not.

On July 26, 2012, Mabel Capolongo, Director of Enforcement for the Department of Labor’s (DOL) Employee Benefits Security Administration, blasted ESOPs because retiring shareholders were selling their stock to the ESOP!

Duh. This is precisely what Congress has endorsed and encouraged since 1984 — to have exiting shareholders of private companies transfer ownership of productive assets to average pay employees in a leveraged ESOP transaction. (Prime example: Internal Revenue Code Section 1042.)

For example, Congress, right or wrong, eliminated some incentives between 1986-1995 that encouraged large, publicly traded companies to establish ESOPs, but the Congress and six former Presidents have consistently affirmed special laws to encourage the creation and operation of ESOPs in private companies, including a major expansion of ESOPs by enacting law in 1998 encouraging ESOPs in S corporations.

Today, it is estimated that 95% of ESOPs created and operating were formed because an existing shareholder sold shares to an ESOP, when it became time for him/her to leave from the company, usually because of age.

It seems DOL wants the existing shareholder not to help create broadened ownership but to liquidate his/her business, or sell it to a private equity firm, or a competitor, resulting in lost jobs!

Meanwhile, there is 35 years worth of overwhelming evidence that private ESOP companies are more productive, more profitable, and more sustainable, providing locally-controlled jobs, compared to similar private companies not employee owned.

Evidence is also clear that during the Great Recession employee stock owned companies laid off employee at a rate of less than 3% while traditionally owned companies laid off employees at a rate greater than 12%.

“The ESOP community wants to work cooperatively with regulators at DOL but having a top DOL official express alarm that exiting shareholders of private companies are selling the stock to an ESOP makes cooperation hard. The expression of dismay by Ms. Capolongo about exiting shareholders selling stock to ESOPs to the benefit of the employees, the company, and American communities demonstrates the Department has no regard for laws encouraging ESOP creation and operation,” said ESOP Association President J. Michael Keeling.

If you would like to read additional comments about the DOL’s enforcement project, read the Jul 27, 2012 issue of the BNA’s Daily Tax Report. The article can be found on page G-6.