Contributing Author: Kristine Custodio Suero, Advanced Certified Paralegal

Recent legislative developments at both the federal and state levels underscore a growing commitment to promoting employee stock ownership plans (ESOPs) as a means to empower workers and foster inclusive economic growth. In May 2025, significant strides were made with the introduction of two federal bills aimed at enhancing ESOP structures, alongside California's proposed SB-713, which seeks to integrate ESOP considerations into state contracting processes.

Federal Initiatives: Enhancing ESOP Participation and Representation

On May 14, 2025, Senator Bill Cassidy (R-Louisiana), chair of the Senate Health, Education, Labor and Pensions (HELP) Committee, introduced two pivotal bills: the Employee Ownership Fairness Act and the Employee Ownership Representation Act.

• Employee Ownership Fairness Act: This bill proposes amendments to Sections 404 and 415 of the Internal Revenue Code, aiming to remove existing limitations that hinder ESOP participants from diversifying their retirement savings and contributing fully to their plans. By excluding ESOP contributions from the total annual defined contribution plan limits, employees would have greater flexibility in managing their retirement portfolios.
• Employee Ownership Representation Act: This legislation seeks to enhance ESOP representation by mandating the inclusion of two new ESOP board members on the ERISA Advisory Council. This move is intended to ensure that the interests of employee-owned companies are adequately represented in policy discussions.

California's SB-713: Integrating ESOPs into State Contracting

In parallel with federal efforts, California has introduced SB-713, authored by Senator Suzette Valladares (R). This bill aims to recognize and incentivize ESOPs within the state's contracting framework.

• ESOP Contractor Certification: SB-713 mandates the Director of the Department of General Services (DGS) to issue an ESOP contractor certificate to qualified contractors. Eligibility criteria include having an independent ESOP trustee, a favorable determination letter from the IRS and a specified percentage of employee participation in the ESOP. The certification would be valid for three years, requiring renewal thereafter.
• Bid Preferences: Starting January 1, 2027, the California Department of Transportation (Caltrans) would be required to ensure that a certain percentage of state-funded construction contracts involve contractors holding the ESOP certification. Bid preferences would be scaled based on the percentage of the company owned by its ESOP, thereby promoting employee ownership in state projects.

Implications for Employers and Employees

These legislative initiatives reflect a broader trend towards supporting employee ownership models. For employers, particularly in the construction sector, obtaining ESOP certification could provide a competitive edge in securing state contracts. For employees, increased participation in ESOPs offers opportunities for wealth accumulation and a more significant stake in their companies' success.

The concurrent federal and state legislative efforts signal a robust commitment to fostering employee ownership through ESOPs. By addressing existing limitations and integrating ESOP considerations into public contracting, these initiatives aim to create a more inclusive and equitable economic landscape. Employers and employees alike stand to benefit from the enhanced opportunities and recognition that these legislative measures propose.

As legal professionals working with closely held businesses and plan sponsors, now is the time to:

• Educate clients on the strategic benefits of ESOP formation or expansion.
• Evaluate existing ESOP plan designs in light of potential changes to contribution limits.
• Partner with contractors and developers to prepare for SB-713 compliance and certification opportunities.
• Advocate for policy evolution that supports sustainable employee ownership as a pillar of workforce equity and business succession.
• Promote ESOPs as a succession planning strategy for small business owners who want to preserve their legacy, reward loyal employees and ensure business continuity without selling to a third party or private equity firm

Many small business owners are approaching retirement without clear succession plans. ESOPs offer a tax-advantaged and mission-aligned pathway to transition ownership to the very employees who helped build the business—while maintaining community roots and operational stability.

Contact Schechter Benefits Law Group to explore how an ESOP could work for your business.