An Employee Stock Ownership Plan (ESOP) is a benefit that is typically provided by a privately held company to benefit itself, its shareholders, and its employees. With a deferred-tax benefit to employees, it is also a highly sought after and coveted benefit that many employers use to attract new talent. ESOPs work best for a business that has an educated and diverse workforce that serves in a variety of roles. While there are different types of ESOP plans available to provide, the most common type offered is a non-leveraged ESOP. This provides the maximum benefit to nearly everyone involved by encouraging the growth of the company, incentivizing shareholders by providing liquidity if needed, and giving a tax-favored advantage to employees at no cost to them that they can use in retirement or earlier. ESOPs are regulated by the Department of Labor and collapse under the Employee Retirement and Income Security Act of 1974 (ERISA) for IRS tax code purposes.
Additional ESOP Benefits for Businesses and Employers
ESOP benefit offerings encourage the company contributing company to invest in its own success and provide a source of internal charge if the business happens to need liquidity. Contributions to fund the plan are constantly made in non-borrowed funds like stock or cash contributions that are tax-deductible in most cases. The company’s newly issued stocks are evaluated, and the contributing employer has some discretion in the amount that’s used to fund the contributions held in the ESOP trust. Improved cash flow and a reduced tax duty are the primary motivating factors that produce non-leveraged ESOP benefits appealing to the contributing company.
A Shareholder’s Benefit to Investing with ESOPs
An ESOP provides shareholders with the advantage of investing in a company which may otherwise not be accessible. Since ESOP shares are easily liquidated, the shareholder also benefits from having instant access to their funds instead of having to take a deferred payment agreement. Shareholders may also profit from the sale of their shares to the ESOP to reinvest elsewhere as a way to defer taxation on any gains from the sale. It’s important to remember that this only applies in certain situations and it is best to seek advice from a tax attorney or accountant prior to buying or selling with any ESOP.
The Employee’s Benefit with an ESOP
Employees perhaps benefit the most from their company offering an ESOP. With an ESOP, they get a benefit that does not cost anything and supplies a tax-deferred nest egg which may be used in retirement and even earlier in some situations. ESOP plans also allow for a beneficiary or an estate to get the proceeds of sale at the event of the employee passing away. ESOP plans benefit workers with a reasonable period of service that plan on staying employed with the company until retirement. The increase the share’s value can provide a rather lucrative retirement or safety net if the company closes prior to the employee’s expected retirement date. The employee can receive cash if the business closes early and the taxes and associated penalties could be negated when rolled over to a qualified IRA plan. This is also true when the worker leaves the company on their own or is terminated. Specifics regarding the tax treatment, distribution, and specifics of any ESOP plan should be reviewed by a qualified attorney or accountant prior to making any transactions.
Overall, an ESOP benefit is a great selection for businesses that wish to have choices when it comes to growth and reducing tax liabilities. Shareholders benefit from the easy liquidity, tax treatment, and opportunity that an ESOP offers to diversify their portfolio. Employees appreciate the multipurpose benefit an ESOP provides for retirement and in situations where a safeguard is useful. A qualified attorney or tax professional is able to discuss the benefits and drawbacks of ESOP plans and should be consulted with before investing in any ESOP or other financial product involving risks.