New Act Clears IRS Roadblocks for Employee-Owned Companies, Boosting Worker Retirement Savings

The Employee Ownership Fairness Act of 2025 is designed to fix a wonky but critical problem that has been holding back retirement savings for millions of employees who own a piece of their company through an Employee Stock Ownership Plan (ESOP). Essentially, this bill updates the tax code to make sure that when an ESOP company does really well, the employees who own it actually get to keep the full benefit without running into arbitrary IRS contribution limits.

The Problem: Too Much Success

Think of an ESOP like a special retirement account where the company’s stock is the main asset. When the company thrives, that stock value—and your retirement account balance—jumps up. The IRS, however, has rules (specifically Sections 404 and 415 of the Internal Revenue Code) that cap how much can be contributed to any qualified retirement plan each year. For ESOPs, this creates a bizarre situation: the better the company performs, the more likely the employee contributions will exceed these caps. This forces companies to stop contributing to the ESOP or even prevent them from offering matching contributions in other plans, like a 401(k), just because the ESOP is too successful. It’s a classic case of bureaucratic rules punishing success.

Separating the ESOP From the 401(k) Limits

This Act cleans up that mess by creating a clear dividing line between ESOP contributions and contributions to other plans. Under Section 3, the law now requires that the contribution limits for an ESOP must be calculated separately from any other defined contribution plan, like your standard 401(k). This means your ESOP’s growth won’t accidentally choke off your ability to contribute to or receive matching funds in your separate 401(k), allowing you to diversify your savings without penalty.

What Doesn't Count as a “Contribution” Anymore

The biggest win for employees is how the bill redefines what counts toward those annual IRS caps. When calculating the annual addition limits (Section 415), the ESOP must now ignore two key types of contributions:

1. Contributions made using employer stock: If the company contributes its own stock directly to your account, that value no longer counts toward the limit.
2. Contributions used to pay off ESOP loans: Many ESOPs are created when the company takes out a loan to buy stock for the employees. The employer’s payments on that loan, which fund your stock ownership, will no longer count against your annual cap.

What does this mean for the average ESOP participant? If you work at a successful company that uses an ESOP, this change could dramatically increase the amount of tax-advantaged wealth you can accumulate. For example, if you're a foreman at an ESOP-owned construction firm, your account can now grow based on the company’s performance without hitting the old regulatory ceiling, potentially adding thousands of dollars to your long-term retirement security. Even better, if an employee leaves and forfeits unvested stock, those forfeited shares that get reallocated to other employee accounts also won't count against the annual addition limits, further maximizing employee benefit.

In short, this Act removes the regulatory speed bump that penalized successful employee ownership, making it easier for ESOP companies to reward their workers without running afoul of outdated tax rules. These changes apply to all plan years starting after the Act becomes law.