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 workers, it is also a highly sought after and coveted benefit that many employers use to attract new talent. ESOPs work best for a business which has an educated and diverse workforce that functions in a variety of roles. While there are different types of ESOP programs available to offer, the most common type offered is a non-leveraged ESOP. This provides the most benefit to nearly everyone involved by promoting the growth of the company, incentivizing shareholders by providing liquidity if necessary, and providing a tax-favored benefit to employees at no charge to them they can use in retirement or earlier. ESOPs are regulated by the Department of Labor and fall under the Employee Retirement and Income Security Act of 1974 (ERISA) for IRS tax code purposes.
Additional ESOP Benefits for Companies and Employers
ESOP benefit offerings encourage the employer contributing company to invest in its own success and provide a source of internal charge if the business happens to need liquidity. Contributions to finance the plan are constantly made in non-borrowed funds like cash or stock contributions that are tax-deductible ordinarily. The company’s newly issued shares are appraised, and the contributing company has some discretion in the amount that’s used to finance the contributions held in the ESOP trust. Improved cash flow and a reduced tax duty are the primary motivating factors which make non-leveraged ESOP benefits attractive to the contributing company.
A Shareholder’s Benefit to Investing with ESOPs
An ESOP provides shareholders with the benefit of investing in a business that might otherwise not be available. Since ESOP shares can easily be liquidated, the shareholder also benefits from having instant access to their funds instead of having to accept a deferred payment agreement. Shareholders may also benefit from the sale of the shares to the ESOP to reinvest elsewhere as a way to defer taxation on any profits from the sale. It’s important to note that this only applies in certain situations and it is best to seek advice from a tax attorney or accountant before purchasing 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 that can be used in retirement and even earlier in some situations. ESOP programs also allow for a beneficiary or an estate to get the proceeds of sale at case of the employee passing away. ESOP plans benefit workers with a fair period of support 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 get 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 if the employee leaves the company on their own or is terminated. Specifics regarding the tax treatment, supply, and specifics of any ESOP plan should be reviewed by an experienced 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 provides to diversify their portfolio. Employees appreciate the multi-purpose benefit an ESOP provides for retirement and in situations where a safeguard is useful. A professional 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.