ESOP stands for employee stock ownership plan. An ESOP is a retirement plan that provides a company’s workforce with an ownership interest in the company. In an ESOP, companies provide their employees with stock ownership, often at no up-front cost to the employees. ESOP shares, however, are part of employees’ remuneration for work performed. ESOP shares are allocated to employees and may be held in an ESOP trust until the employee retires or leaves the company. The shares are then sold. ESOPs are regulated by Employee Retirement Income Security Act (ERISA), a federal law that sets minimum standards for investment plans in private industry.
To be an ESOP, the plan must be specifically designated as an ESOP in the plan document, and must comply with special ESOP requirements of the Internal Revenue Service (“IRS”). For more information on starting an ESOP, contact us, and we are happy to assist!
What is an ESOP? Here are seven key points on how ESOPs work:
- ESOPs are highly tax-favored way for employees to share ownership in their company through a trust fund.
- Companies make tax-deductible contributions to the ESOP. ESOP contributions are either allocated to participant accounts or used to repay the ESOP loan.
- When a portion of the ESOP loan is paid, a portion of the shares is allocated to participant accounts.
- ESOPs allocate shares to each eligible employee every year, giving employees an increasing ownership stake as they gain seniority.
- The ESOP distributes these shares to employees to fund their retirement.
- All ESOP rules balance two competing interests—that they are flexible enough so that employers will be willing to set an ESOP, but not so flexible that they are easy to abuse.
- An ESOP company is worth what a willing buyer would pay for the company to have the rights to its future earnings and its current assets.
Is an ESOP right for your company?
Explore various Ownership Transition Options.
If you would like further information about ownership transition options, please contact us. SES ESOP Strategies welcomes the opportunity to provide complimentary and confidential advice.