The U.S. tax code does more than raise revenue—it’s also a tool to shape behavior. From discouraging unhealthy habits through “sin taxes” on tobacco and alcohol, to promoting goals like homeownership, education, or starting a family through credits and deductions, tax policy is one of Congress’s most powerful levers.
Section 1042 of the Internal Revenue Code is no exception. It was designed with two major goals in mind:
- To encourage business owners to sell their companies to employees through an ESOP (Employee Stock Ownership Plan)
- To incentivize those same owners to reinvest their proceeds into the economy
Addressing a Growing Retirement Crisis
Multiple studies have highlighted the worsening state of retirement security in the U.S.:
- A study by the NCEO found that approximately 65% of Americans have insufficient retirement savings.
- A recent AARP report revealed that 1 in 5 adults over age 50 has saved $0 for retirement.
- In 2024, the National Council on Aging reported that nearly 80% of older U.S. households—roughly 47 million—are either financially insecure or at risk of becoming so as they age.
Through ESOPs, business owners can help narrow this retirement gap by transferring ownership to employees, giving them access to retirement-building equity. Section 1042 provides a strong incentive for business owners to take this path, offering the opportunity to defer or eliminate capital gains taxes when they sell to an ESOP and reinvest in Qualified Replacement Property (QRP).
This tax incentive does more than help individuals—it reduces future strain on state and federal programs tasked with supporting an aging population lacking adequate retirement resources.
Reinvesting in the U.S. Economy
Section 1042 requires that sale proceeds be reinvested in QRP, which includes stocks or bonds of U.S. domestic operating companies. This requirement ensures that the capital generated from the ESOP sale stays within the U.S. economy, supporting jobs, innovation, and long-term growth.
A Bipartisan Success Story
In the political environment, few policies earn support across party lines. But ESOPs—and the tax benefits tied to a Section 1042 election—are a rare exception. They offer a triple benefit: helping business owners, strengthening employee retirement security, and reinvesting in American companies.
Learn more about the power of Section 1042, and how business owners can defer capital gains taxes by reinvesting sale proceeds into Qualified Replacement Property (QRP).
Explore Lazear’s proprietary 1042 tax solution by clicking here.
