Do All Employees Have to Participate in the ESOP?
No. However, in order to satisfy IRS nondiscrimination guidelines, the ESOP must cover a substantial percentage of non-highly compensated employees who have attained age 21 and completed a year of service. For this reason, ESOPs established by smaller companies usually cover all employees who have satisfied these minimum age and service requirements.
SES ESOP Strategies can help you to address a full range of reporting and compliance requirements.
In What Kinds of Privately Held Companies Do ESOPs Work Best?
ESOPs operate successfully in a broad range of companies large and small, public and private. The ideal private company candidate will meet most of the following criteria:
- The company has strong cash flow and a history of increasing sales and profits.
- The company has consistently been in a high federal income tax bracket.
- The company has substantial stockholder equity.
- The company has capable second-line management in place.
SES ESOP Strategies also offers an online tool to help you self-assess ESOP feasibility. Our qualifying questions may help you in deciding to take the next step.
Internal or External Ownership Transition
Of the more than 12 million privately owned businesses in the U.S., 70% will be changing hands in the next 10-15 years. Most of the owners of these companies will not have spent time planning for their retirements, much less having planned for how they will sell or transfer ownership of their company. And remember with capital gains rates at an all-time low and expected to rise in 2013, this may be the best time to sell. A solution that should be considered is selling some or all of a company’s stock to an Employee Stock Ownership Plan (ESOP).
ESOP Guidelines ESOP Guidelines were created to streamline the design of employee stock ownership plans (ESOPs). ESOPs provide a company’s workforce with an ownership interest in the company. ESOP Guidelines for setting up ESOPs ESOP guidelines start with determining the company’s value, since the ESOP cannot pay more than fair market value for the stock.
How do I set up an ESOP?
The first step in the process is determining the company’s value, since the ESOP cannot pay more than fair market value for the stock it purchases. Both the Internal Revenue Service (IRS) and the US Department of Labor (DOL) have issued guidelines governing the valuation of company stock in ESOP transactions.