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SECURE 2.0 Act – Section 114. Deferral of Tax for Certain Sales of Employee Stock to Employee Stock Ownership Plan Sponsored by S Corporation
Congress took a modest step in enhancing the tax incentive available to shareholders selling stock of a corporation to an employee stock ownership plan (ESOP). Under current law, section 1042 of the Internal Revenue Code ("Code") allows an individual owner of stock in a non-publicly traded “C” corporation sponsoring an ESOP to elect to defer the recognition of gain from the sale of such stock to the ESOP.
Requirements for deferral include that the seller reinvests the sales proceeds into qualified replacement property (such as stock or other securities issued by a U.S. operating corporation). Section 114 of Secure 2.0 Act (SECURE 2.0) expands the gain deferral provisions of Code section 1042 to also include shareholders of “S” corporations.
Beginning in 2028, the nonrecognition of gain treatment that applies to qualifying sales of “C” corporation stock to an ESOP also applies to sales of “S” corporation stock. However, unlike with sales of “C” corporation stock to an ESOP, only a portion of the sale of qualifying S corporation stock to an ESOP is eligible for deferral treatment. In the case of a sale of “S” corporation securities, the election to defer recognition of gain applies to no more than 10 percent of the amount realized on the sale. Other requirements under section 1042 continue to apply.
As noted above, the effective date of this change is for sales made after December 31, 2027.
Note that SECURE 2.0 Act makes other changes to ESOPs including Act Section 346. This provision is intended to boost employee ownership programs through the Department of Labor, which can make grants to promote employee ownership through existing and new programs.
Funds are authorized to be appropriated for the purpose of making grants for fiscal years 2025 to 2029. These changes are beyond the scope of our current series of articles on SECURE 2.0 but may be of interest to companies and ESOPs when additional details become available.
If you have any questions about SECURE 2.0, please contact a member of the Schneider Downs Retirement Solutions team at [email protected].
This article is part of a series highlighting the impact of the SECURE 2.0 on retirement plan sponsors, participants and retirees. You can view our full catalog of SECURE 2.0 articles here or download our comprehensive SECURE 2.0 eBook here.
About SECURE 2.0
SECURE 2.0 was signed into law by President Biden on Dec. 29, 2022, as part of a $1.7 trillion omnibus spending bill.
This massive piece of legislation builds on the foundation that was laid by the 2019 Setting Every Community Up for Retirement Enhancement (SECURE) Act to further improve upon the success of the private employer-based retirement system by making it easier for businesses to offer retirement plans and for individuals to save for retirement.
The full text of SECURE 2.0, including provisions that affect pension and cash balance plans, may be found on pages 2,046-2,404 of the omnibus Consolidated Appropriations Act of 2023.
Schneider Downs Retirement Solutions has experience in all facets of qualified and non-qualified plan delivery, which allows us to be flexible to the needs and direction of our clients. Our specialized team of advisers and consultants provide objective advice and expertise to help plan sponsors govern their retirement plans appropriately, mitigate risk, improve participant outcomes and support efficient and compliant plan operations.
Schneider Downs Wealth Management Advisors, LP (SDWMA) is a registered investment adviser with the U.S. Securities and Exchange Commission (SEC). SDWMA provides fee-based investment management services and financial planning services, along with fee-based retirement advisory and consulting services. Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice. Registration with the SEC does not imply any level of skill or training.