News & Updates

Is an ESOP Right for You?

The U.S. Department of Labor’s Employee Benefits Security Administration (EBSA) recently announced a significant update to its national enforcement priorities for fiscal year 2026. Among the most notable changes: Employee Stock Ownership Plans (ESOPs have been removed from the National Enforcement Project (NEP) list.

This represents one of the most meaningful regulatory shifts affecting ESOPs in recent years. Below, we break down what this change means for business owners, ESOP sponsors, and companies considering an ESOP.

1. Reduced “Automatic” Scrutiny of ESOPs

Historically, inclusion on the National Enforcement Project list meant that ESOPs were a proactive target for Department of Labor investigations. In many cases, audits were initiated not due to a specific complaint, but because the plan fell within a nationally targeted enforcement category.

What’s changed:
With ESOPs removed from the NEP list, they may no longer face the same level of automatic, targeted scrutiny. While DOL audits can and do still occur, ESOPs are no longer singled out as a national enforcement priority.

What this means for ESOP companies:
This shift suggests a move away from broad, programmatic investigations toward a more balanced, issue-driven enforcement approach.

2. A Broader Shift in Enforcement Priorities

In its announcement, EBSA emphasized that it is “recalibrating” enforcement efforts to focus on areas that produce the “best results” and prioritize serious misconduct rather than minor foot faults.

EBSA’s new national focus areas include:

Cybersecurity
Mental health and substance use disorder benefits
Surprise medical billing
Protecting benefit distributions
Retirement asset management

Key takeaway for ESOP sponsors:
Even as ESOP-specific scrutiny declines, companies should ensure strong compliance in areas now receiving heightened attention—particularly cybersecurity protections and proper handling of participant distributions.

3. Retirement Asset Management Still Matters

Although ESOPs were removed as a standalone enforcement category, retirement asset management remains an explicit enforcement priority.

Why this matters:
Core ESOP issues—such as valuation methodology, transaction structure, and independent trustee oversight—can still fall under broader asset management scrutiny.

Bottom line:
This change should not be viewed as a reason to lower standards. Sound valuation practices, independence, and fiduciary discipline remain essential components of a well-structured ESOP.

Summary: What This Means for ESOP Implementation

Overall, the DOL’s 2026 enforcement shift is generally positive for ESOPs. It signals a regulatory environment in which ESOPs are increasingly treated like other qualified retirement plans, rather than as a category warranting heightened suspicion.

At the same time, the message is clear: the DOL expects plan sponsors to maintain strong controls around cybersecurity, plan operations, and distributions.

For business owners considering an ESOP—or companies already operating one—this moment reinforces the importance of thoughtful structuring, disciplined governance, and proactive compliance.

At Business Transition Advisors, we continue to monitor regulatory developments closely and help clients navigate ESOP transactions with clarity, confidence, and long-term success.

-1/15/2026

Expanded Tax Credits for ESOPs Obtainable in Colorado - Up to $150K

As businesses navigate the evolving landscape of employee ownership and transition planning, a compelling opportunity has emerged in the form of expanded tax credits for Employee Stock Ownership Plans (ESOPs) in Colorado. These tax incentives represent a significant step towards fostering a culture of shared ownership and empowering employees to take a stake in the success of their organization.

The recent developments in Colorado highlight a growing recognition of the value that employee ownership can bring to businesses of all sizes and industries. Whether you are considering succession planning, looking to reward loyal employees, or seeking to drive innovation and competitiveness within your organization, exploring the potential of ESOPs and tax credits is a strategic move that can yield significant benefits in the long run.

Under the prior law, qualified businesses were eligible for a tax credit equal to 50% of the costs incurred to convert the business to an employee ownership structure. The tax credit had a cap of $25,000 for converting to a worker-owned cooperative or an employee ownership trust (EOT), and a cap of $100,000 for converting to an Employee Stock Ownership Plan (ESOP).

With the new law, alternative equity structures such as LLC membership, phantom stock, profit interest, profit sharing, restricted stock, stock appreciation right, stock option, and synthetic equity are now eligible for the tax credit. This marks the first time such alternative equity structures have been officially recognized in a statute at the state or federal level in relation to employee ownership.

Furthermore, the law raises the maximum tax credit limits to $150,000 for ESOPs, $40,000 for EOTs and worker cooperatives, and introduces a $25,000 cap for alternative equity structures. Additionally, partially employee-owned businesses are now eligible for the credit to assist with the costs of expanding employee ownership, with any 20% increase in employee ownership being eligible for the credit, limited to one application per year.

As your trusted advisors in business transition and succession planning, we encourage you to delve into the details of these expanded tax credits and consider how they align with your broader strategic objectives. Our team is here to support you every step of the way, from assessing the feasibility of an ESOP structure to maximizing the tax advantages available in your jurisdiction.

- 7/10/24

New IRS Guidelines Allow for Immediate Implementation of ESOPs for Companies with SIMPLE PLANs

The Internal Revenue Service (IRS) has released Notice 2024-02 that now allows for mid-year termination of Simple Plans if replaced by a safe harbor 401(k) plan. The notice also paves the way for a mid-year sale to an Employee Stock Ownership Plan (ESOP). Even with Notice 2024-02, an ESOP and SIMPLE PLAN cannot co-exist. Until now, an owner whose company had a SIMPLE PLAN had to provide notice of termination of the SIMPLE PLAN to the participants in November that the plan was ending at the end of December of any given year. Therefore, a sale to an ESOP could not take place until the tax year following the year-end termination of the SIMPLE PLAN.

Under the new IRS guidance, a SIMPLE PLAN can be terminated mid-year with 30-day notice to the participants. Once the SIMPLE PLAN has been terminated at any point in the calendar year, a business owner can establish and sell the business to the company’s ESOP. The new timing under Notice 2024-02 allows for significant tax benefits for the seller and the company in the current tax year vs the following year under the old restrictions. The notice also allows for a much sooner liquidity event for the seller and jumpstarts the accrual of significant ESOP benefits for the employees.

- 6/20/24

UPCOMING TAX REFORM

“Increased taxes favor ESOPs. While pundits and advisors debate what tax reform measures will ultimately get passed by Congress, universally the belief is that taxes will go up. ESOPs thrive in this environment because of the tax savings to the selling shareholder and the business, plus the retirement benefits to the employees reduce turn-over and promote loyalty. BTA is bringing on more staff to meet current and expected demand of our ESOP services,” said Fred Thomas, co-founder and Managing Director of BTA.

Under today’s current tax policy, business owners generally pay capital gains tax on the gain recognized when they sell their business. Those taxes could be as high as 37% for individuals in a high tax state. Under the proposed Biden tax plan, capital gains taxes could go up to 43.4% on a federal level, plus state taxes. When you include state taxes, business owners may be paying more than half of their gains in taxes.

Fortunately, business owners have a choice to avoid those taxes when selling a business. Electing tax code §1042 allows business owners to pay no tax when the business is sold to an Employee Stock Ownership Plan. Like a §1031 roll-over to defer the tax on a real estate sale, the §1042 election allows a business owner to rollover the proceeds to another investment and avoid the tax.

ESOPs are not for every situation, but for those business owners that bring in BTA to learn about ESOPs and choose this exit option, that owner will likely end up with more after-tax money in their pocket compared to a taxable sale to a 3rd party.