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 advantage to employees, it’s also a highly sought after and coveted benefit that many companies use to attract new talent. ESOPs work best for a company that has an educated and diverse workforce that serves in many different roles. While there are various sorts of ESOP programs available to provide, the most common type offered is a non-leveraged ESOP. This provides the most benefit to nearly everyone involved by encouraging the development of the company, incentivizing shareholders by providing liquidity if needed, and giving a tax-favored benefit to employees at no charge to them they can use in retirement or sooner. 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 Businesses and Employers
ESOP benefit offerings promote the company contributing company to invest in its 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 such as cash or stock contributions that are tax-deductible in most cases. The company’s newly issued shares are appraised, and the contributing employer 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 obligation are the primary motivating factors which make non-leveraged ESOP benefits attractive to the contributing business.
A Shareholder’s Benefit to Investing with ESOPs
An ESOP provides shareholders with the benefit of investing in a company which may otherwise not be accessible. Since ESOP shares can easily be liquidated, the shareholder also benefits from having instant access to their funds rather than having to accept a deferred payment arrangement. Shareholders may also profit from the sale of their shares to the ESOP to reinvest elsewhere and be able to defer taxation on any gains from the sale. It’s important to remember that this only applies in certain scenarios and it’s best to consult with 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 business offering an ESOP. With an ESOP, they receive 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 scenarios. ESOP programs 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 fair length of support that plan on remaining employed with the company until retirement. The increase the share’s value can give a rather lucrative retirement or safety net if the business closes prior to the employee’s anticipated 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 when the worker leaves the company by themselves or is terminated. Specifics concerning the tax treatment, supply, and specifics of any ESOP plan ought to be reviewed by a qualified attorney or accountant before making any transactions.
In general, an ESOP advantage is a great choice for companies that wish to have options 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 multipurpose benefit an ESOP provides for retirement and in circumstances where a safeguard is useful. A professional attorney or tax professional is able to discuss the positives and negatives of ESOP plans and should be consulted with before investing in any ESOP or other financial product involving risks.