An employee stock ownership plan (ESOP) is similar to a profit-sharing plan. It's a qualified retirement plan and must follow the same coverage, participation and nondiscrimination provisions that govern all retirement plans. However, ESOPs are required to be primarily invested in company stock. They are not required to diversify their investments. While other retirement plans can invest in the employer's stock, ESOPs have unique features and specific uses, making them popular as vehicles for corporate succession planning and finance.
Whether you want to use an ESOP for benefiting employees, supporting corporate growth, corporate finance or corporate succession planning, Employee Benefits Law Group has the expertise to guide you through the process.
ESOPs may borrow money from the company, a third-party lender or a related party to purchase stock from shareholders or buy new shares from the company itself. They can also sell shares to related parties or to the company. They have flexible rules for financing stock transactions, funding benefit distributions and retaining control of company stock or trading in publicly traded stock. An ESOP's S corporation income is not subject to unrelated business income tax (UBIT).
For succession planning, and to fund the purchase and sale of part or all of an owner's interest in a company, an ESOP can offer excellent flexibility and deliver motivating tax advantages, including:
ESOPs do not have to be used just for complex financed transactions. They can allocate shares to employees that are simply contributed to by the company (i.e., newly issued shares). The company can deduct the contribution of the shares based on their appraised value or fair market value. Employees are not taxed on that allocation of stock. ESOPs are the only tax deductible and pre-tax method for granting shares to a broad base of employees – whether in a public or private company.
Employees are not taxed until they receive their benefits at retirement, death, disability or over time after they leave the company. Even then, most ESOP benefits are rolled over to IRAs or other retirement plans – until retirement distributions are required.
Most ESOPs are used by closely held companies with about 20 employees and up, but can be found in companies ranging from family-owned machine shops to large public companies. The approximately 7,000 ESOPs and equivalent plans in the U.S. cover over 13.5 million employees.
ESOPs help businesses keep jobs and improve performance. According to the National Center For Employee Ownership (NCEO):
Our most successful clients understand that with large tax and business benefits come complexity and flexibility. However, with the right guidance that helps to provide the right decisions for the right company, an ESOP can be the right solution. Our in-house combination of attorneys and pension consultants, and our history of consulting and strategic planning in the ESOP field are nationally recognized and available to guide you. We will partner with you to determine if, when, whether and how an ESOP may meet your objectives and needs, and execute the right ESOP strategy plan for you and your company.
"It's not possible to function without a specialist ESOP attorney because there are so many potential wrong turns."
– Jim Colson, CEO, Building Material Distributors