Are ESOP Participants Taxed on their ESOP Accounts?

The value of a participating employee’s ESOP account, including company contributions and any appreciation in the value of the account, is not taxable to the employee while it accumulates in the ESOP.

Distributions from the ESOP are subject to taxation, but favorable tax treatment may apply to lump sum distributions in the form of company stock.

For distributions received prior to age 59-1/2, an additional 10 percent excise tax is generally imposed unless the distribution was made on or after the employees death, disability, or separation from service after attaining age 55. Deductible cash dividends paid to ESOP participants are not subject to the early distribution excise tax; this favorable treatment does not extend to S corporation distributions.

Eligible ESOP distributions may be rolled over into an IRA or another qualified plan, in which case income taxes will be deferred.