This bill disregards certain employee-owned stock repurchases by a business from an ESOP when calculating a foundation's tax on excess business holdings, provided ownership remains below 49%.
W. Steube
Representative
FL-17
The Reduction of Excess Business Holding Accrual Act modifies how private foundations calculate their "excess business holdings" for tax purposes following specific employee stock buybacks. This bill allows a foundation's ownership percentage to disregard certain voting stock repurchased by a business from an employee stock ownership plan (ESOP) if the foundation's total ownership remains below 49%. This provision aims to provide relief for foundations involved in these specific employee stock distribution transactions, provided certain conditions regarding the stock's disposition and the ESOP's age are met.
Tax Bill Eases Rules for Foundations Tied to ESOPs: Retroactive Changes to Stock Buybacks Since 2020
This bill, officially called the Reduction of Excess Business Holding Accrual Act, is all about relaxing a specific tax rule for private foundations that own a piece of a business that also has an Employee Stock Ownership Plan (ESOP).
Essentially, the IRS limits how much of a business a private foundation can own—these are called “excess business holdings”—to prevent foundations from becoming operating companies. This bill creates a carve-out: if a business buys back its own stock from its ESOP when employees are cashing out their shares, that stock won't count against the foundation’s ownership limit. This makes it easier for the foundation to stay compliant with tax rules while the company facilitates employee distributions. This change is actually retroactive, applying to stock purchases made back to January 1, 2020.
The ESOP Exemption: Keeping the Ownership Below 49%
For this exception to kick in, a few things have to be true. First, the stock being bought back must be non-publicly traded, and the company has to cancel or retire it (turn it into ‘treasury stock’). Second, and crucially, the foundation’s total ownership percentage in the business can’t exceed 49% even after the buyback. If the foundation is already sitting at 51% ownership, this rule won't help them.
Think of it this way: if you’re an employee in an ESOP and you’re retiring, the company has to buy your shares back to give you your retirement money. If a foundation is a major shareholder, that buyback process could inadvertently push the foundation over its legal ownership limit, triggering a hefty excise tax. This bill says, “Hold up, if the company is just facilitating the ESOP payout, we won’t penalize the foundation for that specific transaction.” It’s a mechanism designed to smooth the liquidity process for employee-owners while protecting the foundation.
The 10-Year Catch and Real-World Impact
There’s a significant restriction: this special treatment doesn’t apply if the stock purchase happens within the first 10 years after the ESOP was originally established. This means the bill primarily benefits established companies with mature ESOPs, not brand-new employee ownership structures. The goal here seems to be providing flexibility to long-standing, complex ownership arrangements.
Who benefits? The private foundations and the businesses they are tied to. This gives them greater operational flexibility and helps them manage the complex dance of maintaining tax compliance while running an ESOP. For the employees in the ESOP, it’s a positive because it removes a potential tax barrier that could complicate or slow down the process of getting paid out for their shares. While this is highly technical tax law, it ultimately makes it a little easier for employee-owners to get their money when they leave the company, especially those in non-publicly traded companies where liquidity can be a challenge.