What Businesses Need to Know About Employee Stock Ownership Plans

Providing your employees with the best possible compensation package will allow you to both encourage company loyalty and to help attract new talent to your company. Because of these obvious advantages of having an attractive compensation package, employers should look into every possible option to ensure that they are utilizing all of the employee benefit programs that they can afford. One of the most cost effective compensation programs that businesses can offer to their employees is the Employee Stock Ownership Plan (ESOP).

What is an Employee Stock Ownership Plan?

An Employee Stock Ownership Plan is a compensation program that uses a trust to invest and distribute financial benefits to members within the trust group. By law this type of program has to invest the majority of its funds in securities of the company. Contributions made to this trust can be made by either the company or by qualified employees. Contributions made by employees are considered tax free dollars, and therefore this compensation plan offers a tax savings advantage for employees. The employer’s contributions to the trust fund are distributed to individual employee accounts based on the compensation structure created by the company. This structure is based on seniority, position, and salary.

Employees can cash out their accounts after they have become vested. However, the amount of their withdrawal will depend on the vesting rules that are attached to the trust. When the employee reaches the age of 55 they can diversify 25% of their Employee Stock Ownership Plan, as long as they have been in the program for at least ten years. Their next opportunity to diversify will occur when they turn 60 years of age. At this milestone they will have a single opportunity to diversify up to 50% of their account. The employee can withdraw the vested portion of their ESOP when they retire, when their employment is terminated, or if they become disabled. In the event of their death the vested proceeds will be transferred to their estate.

Pros and Cons of an Employee Stock Ownership Plan