An ESOP is a retirement plan that is designed to provide employees with an ownership interest in the company for which they work by investing primarily in stock of the employer. ESOPs are unlike other retirement plans, which typically diversify their holdings by investing in a variety of assets. The ESOP is funded with tax-deductible contributions by the employer, which can be in the form of company stock, or in cash which is used to purchase company stock. An ESOP operates through a trust, under the direction of a trustee or other named fiduciary.
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”).