This week, the 17-state attorney general coalition and the National Association of Wholesaler-Distributors (NAW) escalated their federal challenge to California’s Plastic Pollution Prevention and Packaging Producer Responsibility Act (Senate Bill 54) by filing a motion for preliminary injunction in the Eastern District of California. The motion asks the court to block enforcement of the entire Act while the constitutional challenge proceeds. A hearing is set for January 15, 2027 — which will amount to a long wait. Along with its motion, plaintiffs filed an amended complaint adding a new vagueness theory that ties SB 54’s recyclability requirements to the recent preliminary injunction against California’s labeling law, SB 343.

To be clear, nothing has changed yet. The preliminary injunction has been requested, but not granted. SB 54’s provisions remain fully in force. It was only a matter of time before the coalition moved from complaint to seeking an injunction. But the time has come, the clock is now running.

The Big Development: Program-Wide Relief

The scope of the requested relief may be the biggest takeaway. The motion asks the court to restrain Director Zoe Heller (in her official capacity as head of CalRecycle) and Circular Action Alliance (CAA) from “implementing and enforcing” SB 54 at all. The proposed order would direct the defendants to “immediately cease and desist all ongoing actions implementing or enforcing” the Act.

If granted as drafted, the injunction would effectively suspend the entire SB 54 program — fee collection, registration, reporting, source-reduction mandates, program plan implementation — for all covered producers, because the regulators and the Producer Responsibility Organization (PRO) would be prohibited from administering it. That includes CAA’s first round of invoices, which are expected to issue by early 2027. Notably, the scope of this requested relief materially differs from the injunction granted in the Oregon Extended Producer Responsibility (EPR) case in February 2026, where relief was only granted  to the named plaintiffs.  

The SB 343 Connection

Also worth noting is that the coalition amended its complaint to raise new arguments. SB 54 requires that by 2032, all covered material must be “recyclable,” incorporating the recyclability criteria from Public Resources Code § 42355.51 — four requirements of which were preliminarily enjoined by a different federal court under SB 343 on July 14, 2026. That court ruled the plaintiffs were likely to succeed on their claims that the requirements are unconstitutionally vague and that SB 343 facially violates the First Amendment.

The coalition’s new argument asserts that because the recyclability criteria on which SB 54 depends have been enjoined, the rest of the EPR statute is rendered unconstitutionally vague. Separately, the amended complaint independently challenges the Act’s definition of “covered material” — specifically, the phrase “routinely recycled, disposed of, or discarded” — as failing to provide fair notice to producers about whether the Act applies to their products. Producers therefore cannot determine what compliance requires when the underlying standards have been pulled out from under them. If the court agrees, the implications reach beyond the 2032 recyclability deadline into near-term fee calculations and eco-modulation criteria.

What’s Next?

The coalition’s motion requests a hearing for January 15, 2027, before Judge Dena Coggins. The underlying amended complaint raises twelve counts, but the motion groups them into six overarching constitutional theories — vagueness; extraterritorial reach; dormant Commerce Clause claims (including discrimination, substantial burdens on interstate commerce, and unfairly apportioned taxes), First Amendment violations of speech restrictions, compelled speech, and association; Import-Export Clause violations; and unconstitutional private delegation to CAA. The coalition argues only one claim needs to succeed to obtain its desired relief. Between now and then, expect opposition briefing from CalRecycle and CAA, and potentially an expedited schedule if either side pushes for one.

Here is why this matters. California is not Maine or Oregon. As the world’s fourth-largest economy, a California-scale EPR mandate cannot be ring-fenced. It resets packaging, sourcing, and distribution decisions for every supply chain that touches California commerce. If the court suspends the program, producers will need to decide whether to keep investing in compliance infrastructure or pull back. If the court denies the motion, those same producers face accelerating deadlines with fee invoices arriving in early 2027 and no other off-ramp in sight. Either outcome demands a strategy. Producers navigating these fluid compliance decisions may benefit from discussions with legal counsel.

Internal Revenue Code Section 409(p) (Section 409(p)) imposes significant obligations on S corporation Employee Stock Ownership Plans (ESOPs) with severe penalties for noncompliance. A violation of Section 409(p) can result in a 50% excise tax, deemed distributions to participants, potential loss of tax qualified ESOP plan status, and termination of the company’s S corporation election. Despite the severity of these penalties, Section 409(p) is frequently overlooked or forgotten about as the ESOP lifecycle continues. This article provides an overview of how the Section 409(p) test works, what triggers a failure, and practical strategies for maintaining compliance.

Background and Purpose of Section 409(p)

There are significant tax benefits for ESOP-owned S corporations. Because S corporations are pass-through entities and ESOPs are funded through tax-exempt trusts that are not subject to unrelated business income tax (UBIT) on S corporation income, no federal income tax is paid at either the corporate or shareholder level until ESOP distributions are paid to participants. This allows a 100% ESOP-owned S corporation to retain and reinvest earnings on a fully tax-deferred basis until participants receive distributions, potentially decades later. However, this beneficial tax treatment comes with a catch. An ESOP that holds S corporation stock must comply with the strict anti-abuse rules under Section 409(p).

Congress was concerned that the tax benefits provided to ESOP-owned S corporations could result in abusive structures that disproportionately benefited executives over rank-and-file workers. What was intended to be a broad-based retirement plan granting stock to all employees could become a tax-advantaged vehicle for the few, contrary to the general purpose of an ESOP. To prevent concentration of ESOP ownership among select executives, Congress enacted the Section 409(p) anti-abuse rules for ESOPs that hold S corporation stock.

The Section 409(p) Basics

Under Section 409(p), no portion of an ESOP’s assets attributable to, or allocable in lieu of, employer securities may accrue, or be allocated, directly or indirectly, for the benefit of a “disqualified person” during a “nonallocation year.” That general rule alone is a lot to unpack, but as a gating item this requires S corporation ESOPs to conduct the 409(p) analysis in two steps: (1) identify the “disqualified persons” and (2) determine whether there is a “nonallocation year.”

Step #1: Identify Disqualified Persons

An ESOP participant is a “disqualified person” if:

• The individual owns 10% or more of “deemed-owned shares” (individually); or
• The individual and their family members (such as spouses, children, and parents) own 20% or more of the “deemed-owned shares.”

“Deemed-owned shares” include (a) shares allocated to the participant’s ESOP account, (b) a pro rata share of unallocated shares held in a suspense account (applicable for leveraged ESOPs), and (c) synthetic equity. Notably, deemed-owned shares do not include shares that an individual owns outside the ESOP that are not synthetic equity.

Perhaps the most challenging aspect of Section 409(p) compliance is the breadth of the “synthetic equity” definition. The regulations cast a deliberately wide net that includes the following as various types of synthetic equity:

• Stock options and warrants
• Restricted stock and deferred issuance stock rights
• Stock appreciation rights (SARs)
• Phantom stock units
• Nonqualified deferred compensation (even if not tied to stock value)
• Split-dollar life insurance arrangements
• Rights to acquire stock or assets of a related entity

Step #2: Determine Whether There Is a Nonallocation Year

A “nonallocation year” occurs if disqualified persons collectively own at any time 50% or more of (1) the outstanding shares (including “deemed-owned shares”), or (2) the sum of the outstanding shares, the deemed-owned shares, and the synthetic equity owned by disqualified persons. This calculation also includes shares held by the disqualified persons’ family members, such as parents, children, and spouses.

Note that the Section 409(p) test must be met every day of the plan year to avoid a “nonallocation year.” For this reason, it is important that ESOP-owned S corporations always consider any Section 409(p) impact before creating new potential synthetic equity arrangements or when there may be changes to those arrangements or ESOP participant make-up (including due to employee terminations and other ESOP-related distributions). Keeping Section 409(p) top of mind for the company (and its board and management) and asking the “What about Section 409(p)?” question to your advisors early and often when there may be changes in compensation structures, new hires, or departures is key.

Consequences of a Section 409(p) Violation

If there is a nonallocation year, any S corporation stock held in a disqualified person’s ESOP account is an impermissible accrual, even if the stock had been allocated to the account in a prior year. In other words, under most circumstances, there is a Section 409(p) anti-abuse violation once a nonallocation year occurs resulting in severe penalties, including:

Consequence	Impact
Deemed distribution to disqualified persons	Disqualified persons are taxed on the fair market value of their ESOP accounts as if distributed; 10% early distribution penalty may also apply under Section 72(t)
50% excise tax on S corporation	Excise tax equals 50% of the prohibited allocation amount (i.e., the total value of all deemed-owned shares of all disqualified persons)
50% excise tax on synthetic equity	Additional 50% excise tax on the value of synthetic equity owned by disqualified persons during the nonallocation year
Loss of ESOP status	Plan ceases to qualify as an ESOP; any exempt ESOP loan becomes a prohibited transaction under the Employee Retirement Income Security Act of 1974 (ERISA), triggering additional penalties
Loss of S corporation election	A disqualified retirement plan is not a permitted S corporation shareholder
UBIT exposure	Without ESOP status, the trust loses its exemption from unrelated business income tax on S corporation pass-through income and participants are subject to UBIT on their ESOP shares

Prevention Strategies

Because there is no formal correction program for a Section 409(p) failure, prevention is the only remedy. The following strategies can help avoid a nonallocation year:

• Internal Revenue Service (IRS) Preferred Method. The plan sponsor may transfer S corporation stock from the disqualified persons’ accounts to a non-ESOP portion of the plan or another qualified plan, such as the 401(k) plan. Notably, this preventative method results in the transferred shares being subject to UBIT, so it is often reserved for situations where action must be taken immediately.
• Fail-Safe Plan Language. ESOP plan documents often include provisions that automatically redirect allocations away from disqualified persons or potential disqualified persons when testing approaches threshold levels.
• Exclude Allocations to Highly Compensated Employees Who Would Otherwise Become Disqualified Persons. The ESOP plan document can be amended to make highly compensated employees who are disqualified persons ineligible for additional allocations of employer stock. Because the amendment negatively impacts highly compensated employees only, there are no nondiscrimination or anti-cutback issues.
• Expand Allocations to Non-Disqualified Persons Who Are Not Highly Compensated Employees. The ESOP plan document could be amended to broaden eligibility or increase compensation-based allocations if those amendments do not otherwise result in nondiscrimination testing issues.
• Expand Diversification. The ESOP plan document could be amended to expand diversification beyond the statutory requirement to offer diversification to “qualified participants” (age 55 with 10 years of ESOP participation), subject to the expanded diversification provision passing nondiscrimination testing.
• Accelerate, Reduce, or Eliminate Synthetic Equity. The disqualified persons’ synthetic equity (e.g., stock appreciation rights or deferred compensation) will be subject to a plan document and/or award agreement that may need to be amended with the disqualified persons’ consent before accelerating, reducing, or eliminating their synthetic equity. Importantly, if the synthetic equity is “deferred compensation” subject to Section 409A, all or a portion of the synthetic equity may be accelerated if done in accordance with the Code Section 409A regulations. Companies should consider the Section 409(p) impact when creating potential synthetic equity arrangements as protective language should be built into the plan or agreement at the outset to allow flexibility to adjust or reduce awards automatically to address Section 409(p) issues.

Practical Takeaways

• Test early and often. Be proactive in seeking advice for any Section 409(p) impacts related to potential changes in synthetic equity arrangements or key hires/departures. Do not wait for year-end plan administration to discover a potential failure.
• Know your employees’ family relationships. The expanded attribution rules are a frequent source of an unexpected disqualified person status.
• Track all synthetic equity, including nonqualified deferred compensation. Ensure incentive compensation arrangements are not inadvertently “deferred compensation” that should be included as synthetic equity in the Section 409(p) analysis.
• Monitor stock value changes. Declining valuations can increase the deemed share count of synthetic equity (e.g., cash awards that are not tied to the company’s stock value), which can change the Section 409(p) test results.
• Build fail-safe language into the ESOP plan document.
• Coordinate annually among the third-party administrator (TPA), ESOP legal counsel, valuation advisor, and executive compensation advisors. Lenders to ESOP-owned companies also regularly require plan sponsors to provide Section 409(p) test results on a periodic basis.
• Remember that there is no correction for a failed Section 409(p) test. Prevention is the only cure.

Conclusion

Section 409(p) compliance is essential for all ESOP-owned S corporations, including companies that intend to adopt an ESOP. For additional information on common issues affecting mature ESOPs, please see our prior article Those Unpredictable Teen Years: A Practical Guide to Considerations for Maturing ESOPs.

Section 409(p) is one of the most consequential and least forgiving compliance requirements in the ESOP space. The common pitfalls include: the need to comply with Section 409(p) at all times during the plan year, the expansive family attribution rules, and the broad synthetic equity definition. Together, these create ongoing risks that demand proactive management and ongoing awareness of how changes to the business, synthetic equity arrangements, and underlying ESOP participation and distributions can impact Section 409(p) compliance. Companies that integrate Section 409(p) testing and advanced planning into their governance processes can enjoy the substantial benefits of the S corporation ESOP structure with confidence. Those that do not may find themselves facing penalties that can be catastrophic.

A Guide to Getting Your Qualified Retirement Plan Documents in Sync Before 2026 Open Enrollment

Most compliance problems announce themselves. This one does not. Your plan has been operating under the CARES Act, SECURE 1.0, and SECURE 2.0 for years, your participants have received communications describing those features, and your recordkeeper has administered them faithfully. The only thing that could be missing is the plan language. That gap is permitted by law, but not for much longer, and if you are about to finalize plan highlights, enrollment materials, plan notices, or similar materials for 2026, the gap could be written into another round of participant communications.

Why This Year-End Is Different

For most private-sector qualified retirement plans, December 31, 2026, is the deadline to adopt plan amendments reflecting the SECURE Act of 2019 (SECURE 1.0), the Coronavirus Aid, Relief, and Economic Security Act of 2020 (CARES), the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (Relief Act), and the SECURE 2.0 Act of 2022, along with regulations issued under those laws.[1]

The deadline is not the same for every plan. A qualified plan that is neither a governmental plan nor an applicable collectively bargained plan generally faces a December 31, 2026, deadline. An applicable collectively bargained qualified plan generally has until December 31, 2028, and a governmental qualified plan generally has until December 31, 2029. Parallel deadlines apply to 403(b) plans: December 31, 2026, for a 403(b) plan not maintained by a public school, December 31, 2028, for an applicable collectively bargained 403(b) plan of a Section 501(c)(3) organization, and December 31, 2029, for a public-school 403(b) plan.

What to Do Next (and Before Open Enrollment if Possible)

First, plan sponsors should identify provisions implemented under CARES, SECURE 1.0, SECURE 2.0, and the Relief Act for which no amendment has yet been adopted, working with their recordkeeper and counsel as needed to make such determinations and to conform plan language to actual operation, using the table below as applicable. Because open enrollment communications (and sometimes platform configurations) describe plan terms, best or better practice would include finishing the amendment work before locking down such participant materials, so the plan document, administration, and participant communications sing in harmony with the same hymnal.

Next, confirm the deadline for your specific plan (as noted above). Third, consider running any amendments by your recordkeeper, payroll administrator, and legal counsel prior to adoption. Pay special attention to amendments involving Roth catch-up contributions because they are tricky, so you understand what to do and what to avoid. Finally, maintain proper documentation for efficient planning, sync up open enrollment materials as needed, and hopefully enjoy the chorus that ensues. 

What Plan Amendments Need to Be Adopted by December 31, 2026

The table below lists items for CARES, SECURE 1.0, and SECURE 2.0 with December 31, 2026, adoption deadlines for nongovernmental, non-collectively bargained plans. Items marked “if adopted” require plan language only if the plan sponsor implemented the optional feature.

Issue	Qualified plan types that may be affected	Required amendment	Source of law
Coronavirus-related distributions	Defined contribution plans	If adopted, document the distribution feature, eligible accounts, and any lower plan-specific dollar limit	CARES Act; Notice 2024-2
Increased plan loan limit	Plans that raised loan limits for qualified individuals	If adopted, document the temporary higher loan limit or the lower plan-specified limit	CARES Act; Notice 2024-2
Suspended and extended loan repayments	Plans that delayed loan repayments	If adopted, document the suspension period, extension period, and repayment re-amortization approach	CARES Act; Notice 2024-2
Waiver of 2020 required minimum distributions	Defined contribution plans and 403(b) plans	Document the plan’s treatment of 2020 RMDs (Required Minimum Distributions), extended 2020 RMDs, default elections, and rollover treatment	CARES Act; Notice 2024-2
Relief Act disaster distributions and loans	Plans that used the 2020 disaster relief	If adopted, document disaster withdrawals, increased loan limits, and loan payment deferrals	Relief Act; Notice 2024-2
Higher QACA (Qualified Automatic Contribution Arrangement) automatic deferral cap	401(k) and 403(b) plans with a qualified automatic contribution arrangement	If adopted, document the increased maximum automatic deferral percentage above 10 percent	SECURE 1.0
Safe harbor nonelective contribution changes	401(k) plans using the Actual Deferral Percentage (ADP) safe harbor nonelective contribution	If relied upon, conform notice and mid-year adoption timing provisions	SECURE 1.0
Lifetime income portability	Defined contribution and 403(b) plans	If adopted, document distribution and transfer rights for discontinued lifetime income investments	SECURE 1.0
Qualified birth or adoption distributions	Defined contribution and 403(b) plans	If adopted, document the $5,000 limit, one-year window, and three-year recontribution rule	SECURE 1.0 and SECURE 2.0
Long-term part-time employee eligibility, two-year rule	401(k) and 403(b) plans requiring a year of eligibility service	Mandatory for plan years beginning on or after January 1, 2025, document eligibility after two consecutive 12-month periods with at least 500 hours of service per year, disregarding 12-month periods beginning before January 1, 2023; the earlier SECURE 1.0 three-year rule remains relevant for 401(k) plan years beginning before 2025, where applicable	SECURE 1.0 and SECURE 2.0
Pension plan in-service distributions at age 59½	Defined benefit and money purchase pension plans	If adopted, document the lowered in-service distribution age	Miners Act section 104; Notice 2024-2
Automatic enrollment mandate for newer plans	401(k) and 403(b) plans subject to Code section 414A	Mandatory if applicable. Document Eligible Automatic Contribution Arrangement (EACA) terms, default contributions, permissible withdrawals, and statutory exceptions	SECURE 2.0
Increased catch-up limit for ages 60 through 63	Plans permitting catch-up contributions	If adopted, state clearly whether the plan incorporates the higher limit	SECURE 2.0
Student loan matching contributions	401(k), SIMPLE 401(k), and 403(b) plans	If adopted, document the match design, claim procedures, and matching frequency	SECURE 2.0
Emergency personal expense distributions	Defined contribution and 403(b) plans	If adopted, document the annual limit, $1,000 cap, self-certification, and repayment rules	SECURE 2.0
Pension-linked emergency savings accounts	Individual account plans	If adopted, document eligibility, contribution limits, and distribution mechanics	SECURE 2.0
Benefit overpayment recovery practices	Qualified plans and 403(b) plans	As needed, align plan terms with recoupment practices, including any decisions to forgo recovery	SECURE 2.0
Increased mandatory cash-out threshold	Qualified plans and 403(b) plans	If adopted, document the increase from $5,000 to $7,000	SECURE 2.0
Top-heavy testing for excludable employees	Plans performing separate top-heavy testing	If adopted, document separate testing of excludable and non-excludable employees	SECURE 2.0
Hardship distribution self-certification	401(k) and 403(b) plans permitting hardships	If adopted, document participant certification of the hardship event and amount needed	SECURE 2.0
Domestic abuse victim distributions	Defined contribution plans	If adopted, document the limit, one-year window, self-certification, and repayment rights	SECURE 2.0
Elimination of lifetime RMDs from Roth accounts	Plans with designated Roth accounts	Mandatory. Remove pre-death RMD requirements for designated Roth accounts	SECURE 2.0
Terminal illness tax exception and repayment treatment	Qualified plans and 403(b) plans with otherwise permissible distributions	If adopted, for otherwise permissible distributions, document physician certification, the 10% additional-tax exception, and three-year recontribution rights; terminal illness does not itself create a new distributable event for restricted 401(k) or 403(b) sources.	SECURE 2.0; Notice 2024-2
Surviving spouse election under the RMD rules	Defined contribution and other RMD-covered plans	If adopted, document the spouse’s election to be treated as the employee; regulatory mechanics should track final or subsequent IRS guidance	SECURE 2.0
Qualified federally declared disaster distributions	Defined contribution and 403(b) plans	If adopted, document the $22,000 per-disaster limit and recontribution rules	SECURE 2.0
Recognition of Tribal domestic relations orders	Qualified plans processing domestic relations orders	Mandatory. Confirm an order is not disqualified solely because it arises under Tribal law	SECURE 2.0
Mandatory Roth catch-up contributions	401(k) and 403(b) plans permitting catch-ups	Mandatory. Document affected participants, FICA (Federal Insurance Contributions Act) wage measurement, aggregation, deemed Roth elections, and correction methods. Notice 2023-62’s transition period generally ended after 2025; final regulations generally apply beginning in 2027.	SECURE 2.0; final catch-up regulations
Roth treatment of employer matching and nonelective contributions	Plans permitting Roth employer contributions	If adopted, document eligibility, full vesting, election timing, and irrevocability	SECURE 2.0; Notice 2024-2
Family attribution rule reform	Plans affected by controlled group or affiliated service group determinations	As needed, conform any plan language inconsistent with the revised spousal and parent-child attribution rules	SECURE 2.0; 2024 Required Amendments List
Termination or merger before year-end	Any plan terminating or merging in 2026	As needed, adopt all outstanding amendments no later than the termination date, which accelerates the deadline	Plan termination document-update requirement

Conclusions and Questions to Consider

The gap between what your plan document says and what your plan does is the kind of problem that stays quiet until an audit, participant claim, or set of enrollment materials results in unwelcome noise. The checklist below expands on the considerations above and can be examined with your recordkeeper, payroll provider, and legal counsel, ideally before finalizing this year’s open enrollment package.

1. Which CARES, SECURE 1.0, SECURE 2.0, and Relief Act provisions did our plan implement?
2. What effective date did we use for each implementation?
3. Which deadline applies to our plan?
4. Does our plan text address the mandatory Roth catch-up mechanics, including catch-up eligibility exclusions, FICA wage aggregation, deemed Roth elections, and available correction methods?
5. If we use a pre-approved or prototype document, has the provider issued the necessary amendments, or must we adopt our own supplemental amendment?
6. Do our enrollment materials for 2027, summary plan descriptions, and summaries of material modifications work together (and with our executed amendments)?

Â鶹ֱ˛Ąâ€™s employee benefits practice group regularly guides plan sponsors through document restatement and amendment projects, including retroactive amendment work under Notice 2024-2, mandatory Roth catch-up implementation, pre-approved and individually designed document coordination, and the alignment of plan documents with summary plan descriptions and participant communications. Â鶹ֱ˛Ą routinely uses this experience to advise all types of clients on the nuances of retirement plan administration in an ever-changing regulatory environment, including in the complex contexts of post-acquisition integration, correcting past and avoiding future compliance issues, plan winddowns, and many others.

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Session 1: Tariff Developments in Focus: Where Are Tariffs Going and What Should Companies Be Doing Now to Prepare for Trump Tariffs 2.0? | 12:00 p.m. – 1:00 p.m. CT

Now that the IEEPA tariffs have been invalidated, the new focus of the Trump administration is coming into view: new Section 301 tariffs, expanded Section 232 tariffs, and enhanced enforcement. Trump Tariffs 2.0 will bring major changes to tariff rates, product coverage, and the prospect of sharply different tariffs on different countries. In this session, we will provide an update on the IEEPA tariff refunds and our latest insights into where tariff policy appears to be heading, and what practical steps you should be taking now to assess your exposure and prepare for fast-moving trade policy changes.

Session 2: Life After IEEPA: What Companies Should Be Doing Now on Refund Claims, Commercial Disputes, and Supply Chain Strategy | 1:00 p.m. – 2:00 p.m. CT

With the IEEPA tariffs now invalidated, companies face two urgent and overlapping challenges. First, they must prepare for disputes over tariff refunds, including who may claim them, who may retain them, and how to respond to demands from customers, distributors, and other counterparties. Second, despite the invalidation of the IEEPA tariffs, the broader tariff environment remains volatile, meaning that shifting country-specific exposure continuing to reshape sourcing decisions. In this session, we will provide practical guidance on the steps companies should be taking now to protect their positions on refund-related disputes while also building more flexible and resilient supply chains through better sourcing strategies, improved trade data visibility, and stress-testing of key assumptions.

To register for this two-part webinar, please click on the RSVP button.

Â鶹ֱ˛Ą partner Judy Waltz, chair of the firm’s Health Care Practice Group, is speaking at the upcoming HCCA Healthcare Enforcement Compliance Conference in the session “Federal Administrative Sanctions: Suspensions, Revocations, Exclusions, and Civil Monetary Penalties.” This presentation will cover:

• Government fraud, waste, and abuse enforcement options with administrative remedies including exclusion and a loss of billing privileges for up to 10 years.
• Potential collateral risks such as loss of hospital privileges, inability to receive Medicare payments for extended periods of time.
• Distinguish between Centers for Medicare & Medicaid Services and Office of Inspector General enforcement options.

Building on the momentum and insights generated at Quantum.Tech World 2026 in Boston, Â鶹ֱ˛Ą & Lardner LLP is hosting a virtual follow-up roundtable to further explore the developments, challenges, and opportunities shaping the rapidly evolving quantum technology landscape.

This discussion is a continuation of Â鶹ֱ˛Ą’s engagement with industry leaders, innovators, investors, researchers, and legal professionals who participated in conversations at the conference. The session will revisit key themes that emerged during Quantum.Tech World, examine recent developments across the quantum ecosystem, and provide a forum for deeper discussion on the commercial, regulatory, and strategic issues affecting the industry.

Designed as an interactive discussion rather than a formal presentation, the roundtable will encourage the exchange of perspectives among participants and offer an opportunity to share practical insights on the technologies, partnerships, investments, and policy considerations influencing the future of quantum innovation.

Click here for more information about Quantum.Tech World 2026 in Boston.

To register for this virtual roundtable please .

Are you a private equity buyer presented with an opportunity to acquire a business owned by an Employee Stock Ownership Plan (ESOP)? Be prepared for a unique transaction process. Transactions involving an ESOP shareholder and, more importantly, an ESOP trustee serving as a fiduciary for the ESOP’s participants, can create additional complexity and will likely find the private equity buyer agreeing to terms and encountering issues unique to non-ESOP-related transactions. Notwithstanding the additional complexity involved, these are perfectly manageable scenarios with the right knowledge and expertise and should not dissuade a private equity buyer from an otherwise attractive opportunity. Below are 12 practical and important considerations for the private equity buyer looking to acquire an ESOP-owned company:

1. ESOP Trustee.  Although you may negotiate with the board of directors or executive officers of the target company, the transaction ultimately is subject to the review and approval of the ESOP trustee. An ESOP trustee (a “trustee”) is often an independent, professional trustee (though, in a minority of cases, the trustee may be an individual from inside the target organization). The trustee may receive input from the ESOP participants but will also have its own considerations and separate valuation advisors and counsel. Importantly, any decisions made by the trustee are subject to the fiduciary requirements of the Employee Retirement Income Security Act of 1974 (ERISA). ERISA imposes certain duties on the actions of the trustee, including the duty to act prudently and a duty to act solely in the interest of the ESOP participants (i.e., generally speaking, the employees of the target company). Accordingly, the trustee must conduct a thorough and meticulously documented process to ensure these fiduciary requirements are met and avoid any additional scrutiny from the Department of Labor (DOL) following the sale.
2. Structure Considerations.  Your transaction will likely be structured as a stock purchase. While an asset purchase of an ESOP-owned company is possible, most transactions are structured as stock purchases—many ESOP sponsors and trustees insist on a stock purchase structure, and a stock purchase structure is necessary to avoid a “pass-through” vote of the ESOP participants. In most cases, a “pass-through” vote of the ESOP participants is required under the Internal Revenue Code Section 409(e) and applicable state law in connection with the sale of the assets of a target company, the target company’s entry into a merger, and even an “f” reorganization of the target company—these fundamental transactions cannot unilaterally be approved by the trustee. A pass-through vote is akin to a non-binding shareholder vote but, instead of a vote of shareholders, it is a vote of the ESOP participants. A pass-through vote requires additional time, disclosure, and complexity. On the contrary, in most cases, the sale of the stock of the target company may be unilaterally approved by the trustee, so long as the transaction is fair to the ESOP participants. But be warned, notwithstanding the trustee’s ability to authorize the stock sale, an overly cautious trustee may still require a pass-through vote to bolster its perceived compliance with the ERISA fiduciary obligations. Accordingly, structure should be top of mind during initial negotiations with the trustee. If a pass-through vote is insisted upon by the trustee or target company in connection with a stock purchase transaction, the private equity buyer should consider leveraging the “ask” by requiring an asset sale for further liability protection and to avoid potentially burdensome post-closing ERISA compliance procedures as the ESOP is wound down and terminated post-closing (as these responsibilities would remain with the target company following the sale of its assets).
3. Post-Closing Tax Structure.  The target company will likely be taxed as a C-corporation immediately following the closing of a stock purchase. ESOP-owned companies are typically taxed as S-corporations because income attributable to an ESOP shareholder of an S-corporation is effectively tax-free and the S-corporation structure prevents an unnecessary layer of tax to the otherwise income tax-exempt ESOP. While the trust is an eligible shareholder of an S-corporation, odds are your acquisition vehicle is not. As a result, immediately upon closing of the sale of the equity of the target company, the S-corporation will automatically convert to a C-corporation. If a C-corporation in your ownership structure is an issue, we would suggest consulting tax counsel to determine the availability, if any, of tax-efficient conversion strategies.
4. “Adequate Consideration”.&˛Ô˛ú˛ő±č; The trustee must objectively show that the deal is fair and in the best interests of the ESOP participants. The trustee’s primary goal (and obligation) will be to deliver “adequate consideration” for the shares of the target company and ensure that the sale is in the financial best interests of the ESOP participants—the trustee must comply with the high fiduciary standards imposed under ERISA as that of a “prudent expert.” If it fails to do so, the trustee may face litigation or scrutiny by the DOL. The DOL frequently audits ESOP-related transactions, both on the DOL’s own initiative and in response to claims made by disgruntled ESOP participants. Accordingly, a private equity buyer should expect the trustee to require, as a condition to closing, that the trustee first obtain a favorable “fairness opinion” prepared by an independent financial advisor (or even a full, independent valuation) justifying the ultimate purchase price for the shares of the target company. The “fairness opinion” is an integral part of the transaction process because a sale of the ESOP’s stock for less than “adequate consideration” will be imprudent under ERISA’s general fiduciary standards and will constitute a prohibited transaction under both ERISA and the Internal Revenue Code.
5. Limited Recourse against Seller.  The ESOP’s liability is limited to amounts escrowed at closing. Following the closing, the ESOP will be wound down, with proceeds from the sale either distributed to the ESOP participants or transferred to another qualified retirement plan (such as a 401(k) plan). Accordingly, the trustee must be in a position to distribute sale proceeds without fear of a claim against the ESOP. In addition, any post-closing recovery by the buyer against the assets held in the ESOP likely raises ERISA and Internal Revenue Code prohibited transaction concerns which, if violated, would require both correction of the prohibited transaction and payment of prohibited transaction excise taxes. As such, recovery against the ESOP seller will be very limited as compared to a traditional seller; however, several tactics may be utilized to mitigate the associated risk. It is highly advisable for the private equity buyer to purchase a robust representation and warranty insurance policy and couple its protection with a negotiated special indemnity escrow covering matters excluded from such policy and other specified liabilities identified in diligence. Additionally, a sufficient escrow amount for any purchase price adjustments should be escrowed at closing. But be warned, because escrows or other amounts otherwise withheld from the purchase price at closing are not guaranteed to be paid to the ESOP, such amounts will be excluded by the ESOP’s valuation advisor from the consideration payable to the ESOP for purposes of the fairness opinion. As a result, the trustee may resist the proposed amount of an escrow on the basis that it may jeopardize its ability to obtain a favorable fairness opinion.  Similarly, the trustee may attempt to limit the duration of any escrow or other adjustment period because the potential of its receipt of additional consideration contingent upon events following closing will prevent the ESOP from fully winding up and liquidating until the obligation matures.
6. Careful Structuring of Employment Agreements / Retention Bonuses.  Avoid outsized transaction and retention bonuses payable to target company employees at or following closing. Transaction and retention bonuses are not inherently inappropriate, but the DOL highly scrutinizes transactions involving large transaction or retention bonuses with key members of management of the target company. High transaction bonuses paid at closing serve as a deduction to the purchase price otherwise payable to the ESOP (for the benefit of the ESOP participants) and high retention bonuses to key members of management may serve as evidence of “sweetheart” deals that create a potential conflict of interest for target company management employees who are involved in negotiating the sale transaction on behalf of the ESOP (although subject to trustee approval). As such, a private equity buyer should be cognizant of structuring bonuses such that none of the parties’ collective actions could be deemed to be allocating an inappropriate amount of funds to certain participants of the ESOP to the detriment of the ESOP plan (and its participants) as a whole, or that call into question the ability of management to objectively evaluate the merits of the transaction on behalf of the ESOP (and its participants). Remember, as the purchaser of the stock, the private equity buyer will own the plan sponsor (i.e. the target company) following the closing, leaving your portfolio company open to the risk of residual claims brought by the DOL or participants of the ESOP, so it is important to ensure a fair process that complies with all ESOP-related provisions of ERISA and the Internal Revenue Code.
7. Termination of the ESOP.  In the context of a stock sale, the ESOP might formally terminate at closing, but the process of winding up and liquidating the ESOP will continue for an extended period following closing, and as such, responsibility for continued ERISA compliance rests with the target company (now under the private equity buyer’s ownership) and the trustee. After the closing of a stock purchase of an ESOP-owned company, the ESOP will be wound down, and proceeds will either be distributed to ESOP participants or transferred to a 401(k) plan or another qualified retirement plan on behalf of the ESOP participants; however, the ESOP cannot be fully wound-up and liquidated until all rights to potential future payment have been finally determined. In other words, the ESOP will be frozen but will continue in effect until any escrows or other adjustments are finally determined and paid. During this period of post-closing existence, the buyer and target company must continue to comply with the terms of the plan (i.e., maintaining ESOP formalities, filing annual reports, securing a plan audit (if required), etc.). Importantly, trustees typically require that a portion of the purchase price proceeds remain in the ESOP until the Internal Revenue Service has issued a favorable determination letter holding that the termination of the ESOP does not adversely affect the ESOP’s status as a tax-qualified retirement plan. The combination of these factors means that the complete wind-up and liquidation of the ESOP will be a lengthy process that continues well beyond the transaction closing date. 
8. Retention Issues.  A large number of your (newly acquired) workforce may receive substantial cash benefits from the transaction, resulting in potential retention issues. Unlike a traditional transaction, where a small number of individuals receive closing consideration and do not likely continue as employees of the target company, in an ESOP transaction it is possible that a target company’s most seasoned and longest tenured employees will receive significant consideration resulting from the sale. Accordingly, a private equity buyer should consider entering into employment agreements or other reasonable post-closing bonus arrangements for key employees of the target company to ensure continued retention and preservation of the value of its investment.
9. ESOP Due Diligence.  Do your diligence. It is important to conduct a fulsome diligence exercise with respect to the formation of the ESOP, its past activities (to ensure current and historic compliance with applicable laws and regulations), and the existence and adequacy of fiduciary insurance policies. Fulsome diligence may result in added transaction costs but is highly advisable considering that the ESOP will be examined with the highest-level scrutiny upon wind-up, termination, and accompanying distribution of sale proceeds. It is possible for a DOL investigation to be triggered by one formal complaint by an ESOP participant arguing that the target company was sold at less than fair value. Furthermore, the target company has likely agreed to indemnify internal plan fiduciaries (i.e., the trustee and the board of directors) for any liability they may incur related to the operations of the ESOP; therefore, if operational/compliance issues are not identified and remedied early in the transaction process, special escrows will be required to mitigate this risk which, as discussed above, could affect the trustee’s ability to obtain a favorable fairness opinion.
10. Fiduciary Liability.  Purchase a fiduciary liability tail policy.  In addition to the potential indemnification of internal plan fiduciaries, the target company has likely contractually agreed to indemnify the trustee as a key term of the trustee’s engagement and likely has insurance policies to backstop this potential obligation. Do not forget to purchase a tail policy at closing, as this will likely be your sole recourse in the event that a claim is subsequently made against the trustee. These potential indemnity obligations serve as further justification for a highly detailed due diligence exercise prior to closing, as fiduciary errors by the ESOP trustee or internal plan fiduciaries likely will be the burden of the acquired company post-closing.
11. Significant Trustee Leverage.  The trustee does not have a financial interest in the transaction. Unlike a traditional acquisition, where sellers may be willing to assume outsized risk in the face of a considerable payday at closing, the trustee does not financially benefit from the closing of the acquisition. From a business perspective, it is more favorable to the trustee for an ESOP to remain in place (as ESOP administration fees are how the professional trustee earns its living). If the terms of the deal are too risky or otherwise could potentially call into question the trustee’s satisfaction of its fiduciary obligations to the ESOP, expect a firm “no” to the risk-shifting proposition. Accordingly, a private equity buyer must carefully pick its battles considering the dynamic—any unwavering, hardline positions run the risk of potentially jeopardizing the acquisition. A private equity buyer should be prepared for middle-of-the-road (or skewing seller-friendly) deal terms in any acquisition of an ESOP-owned company.
12. Transaction Timeline.  Prepare for an extended transaction and closing timeline. There are a number of factors that will likely cause the closing of the acquisition to occur at least 90 to 120 days after the execution of a letter of intent. Professional trustees are notoriously busy, servicing dozens (if not hundreds) of ESOPs on a regular basis, and the speed at which the transaction moves is in part dictated by the trustee’s (and trustee’s counsel’s) cooperation. Many institutional trustees have detailed (and generally inflexible) processes for considering and approving transactions. Additionally, the unique aspects of the deal, such as heavy ERISA and tax due diligence, negotiations regarding the post-closing wind-down and termination of the ESOP, the involvement of the trustee and its independent valuation consultant (needed for the fairness opinion), and trustee legal counsel, among many other factors, tend to extend transaction negotiation and closing past timelines that would otherwise be considered “market” in a traditional private equity acquisition. As such, a private equity buyer should reserve a sufficiently long exclusivity or “no shop” period when negotiating a letter of intent for the acquisition. Trustees are generally reluctant to grant exclusivity on the grounds that doing so might be inconsistent with their fiduciary obligations under ERISA but typically will agree not to affirmatively “shop” the business during the prescribed period.

In sum, there are a number of complexities and unique considerations associated with the acquisition of an ESOP-owned company; however, these complexities and unique considerations can be mitigated by sufficient due diligence and fulsome discussions with the trustee early in the process. This, coupled with the engagement of counsel well-versed in these unique types of transactions, will save time and money and will help secure a favorable outcome for all parties involved.

Â鶹ֱ˛Ą partner Aaron Tantleff is speaking in the upcoming Data Privacy for Health Summitt on the panel “AI in Healthcare: From Innovation to Liability.” From training data to regulatory scrutiny, this panel will explore how AI is transforming life sciences, and where responsibility lies when things go wrong.

The Boston edition of the Data Privacy for Health Summit will bring together professionals from biotech, medtech, eHealth, CROs, and diagnostics to tackle key challenges around health data.