SaaS Financial Modeling 101

Invest in Your Employees
and Your Business with an ESOP

As of 2022, the National Center for Employee Ownership (NCEO) estimates roughly 6,500 ESOPs covering almost 14 million participants.

ESOP Rollout

The goal in rolling out your ESOP is to help your employees understand the ‘why’ behind the ownership transition, create trust and transparency in the conversion, and align the next steps in the lifecycle of the ESOP.

With our assistance, you can

Communicate questions your staff may have during the ESOP transition
Establish an ESOP strategy for your announcement and rollout
Identify best practices to include in the first phase of employee ESOP education
Partner with executive leadership and administrative talent to identify 12-month ESOP goals

ESOP Administration

The in-house ESOP administration functions will become a daily responsibility for your organization. With our assistance, you can

Coach leadership on future administrative and operating policies
Determine best practices in human resources information systems/payroll for annual census reporting
Develop best practices for your administrative lead on managing and preparing for your qualified plan audit(s), ESOP, and 401k, if applicable
Establish annual timeline in conjunction with other benefit administration responsibilities
Identify best practices and rollout for delivering annual employee statements
Mentor ESOP administrative lead and leadership team on the annual administration cycle

Workforce Planning & Advancement

While one of the benefits of the ESOP is nothing changes, it is also an invitation to think in new and creative ways. Research shows informed, interested, and involved employees increase company performance. With our assistance, you can:

Consider opportunities and action plans to measure employee engagement
Determine opportunities to educate, recognize, and celebrate staff
Establish your ESOP communications team and meeting rhythms
Identify financial literacy learning opportunities for your staff
Provide opportunities for staff to understand how company decisions and financials impact their role, daily operations, and business objectives
Select mediums to provide cascading communications with staff

ESOP Tax Services

ESOPs offer substantial tax benefits to business owners and their companies. We take the following into account:

Ensure tax minimization strategies are explored and implemented promptly through regular meetings with your finance team
Consult with management throughout the year to ensure the proper treatment of transaction items, including the annual yearend financial and tax physical
Emphasize optimal tax minimization strategies for federal, state, and local taxes while meeting compliance obligations
Optimize future investments and exit strategies with a proper tax and business structure
Take into account a volatile tax landscape with long-term tax planning
Determine research and development credits, including Employee Retention Credits
Research cost-segregation tax benefits
Consider accelerated depreciation, including Section 179
Look at outside services or subcontractors, including worker classification
Identify potential tax implications of shareholder loans and IRS risks to ensure proper documentation.

Workforce Planning & Advancement

Your ESOP will take center stage in aligning your employees to your company’s business plan. The workforce planning process will be the foundation for talent acquisition and employee development to develop high-functioning and productive employees. With our help, you can:

Determine rewards and recognition programs to support your workforce
Develop branding and marketing strategies to attract and retain candidates and staff
Identify people development strategies and talent needs to aid the growth of the company
Reinforce your development of recruiting and selection strategies

ESOP Tax Advantages

Capital gain on the sale of shares of a C-Corporation to an ESOP may be deferred by the selling owner as long as, among other requirements, the ESOP owns 30% or more of the corporation’s shares after the transaction and the selling owner invests the sale proceeds in the qualified replacement property. »
The percentage of profits of an S-Corporation owned by an ESOP is not subject to federal (and possibly state) income tax because ESOPs are income tax exempt. »
Contributions by the company to the ESOP (including contributions used by the ESOP to pay principal and interest on a loan) are considered contributions to a tax-qualified employee benefit plan and are tax deductible within certain limits. »
Dividends paid on stock held by the ESOP are tax-deductible to a C-Corporation (but not an S-Corporation) if distributed to ESOP participants or are used to pay principal and interest on a loan.
There are estate and charitable gifting planning opportunities for the selling owner.
Employees receive tax-deferred retirement benefits, eligible for tax-free rollover upon distribution from the ESOP.

Ongoing Support for ESOP Ownership

Congratulations on your Employee Stock Ownership Plan. Berman Hopkins developed our Support for ESOP Ownership services due to experience with other clients that needed guidance after the transaction through the implementation phase. If desired, Berman Hopkins can be a resource in providing these possible services that might be helpful as your company moves into the compliance requirements of becoming an ESOP company:

TRANSITIONAL SUPPORT:

ESOP communication presentation/ explanation of ESOP to company employees
ESOP accounting for initial transactions
Banking related to ESOP issues - line of credit/ bank account, etc.
Support related to ESOP trustee »
Fiduciary insurance - trustee/board
Confirm independent appraiser and timing of the valuation
Support company in retaining a third-party administration
Advice related to Board of Directors
Assist with IRS determination letter annual audit support
Consultation with the auditor’s CPA regarding transactional accounting
Banking related to ESOP issues – line of credit/bank account
ESOP accounting issues related to transactions
ESOP accounting ongoing classification
ESOP accounting contra equity account
ESOP tax planning » ESOP accounting compensation expense

ONGOING SUPPORT

ESOP accounting for continuing contributions »
Support for share release calculations
Accounting for compensation expense »
Management of benefit levels »
Consulting on IRS and DOL Compliance
Audit and bank compliance support »
Support for participant reporting

LONG-TERM SUPPORT

Accounting for changes in loan agreements
Diversification requirements
Assistance with policy updates
Repurchase liability planning
Maintaining proper corporate records
Repurchase liability planning
Consulting related to managing movement of shares after distributions (recycle vs. releverage considerations)