An Employee Stock Ownership Plan (ESOP) is a benefit that’s typically provided by a privately held company to benefit itself, its shareholders, and its employees. With a deferred-tax advantage to workers, it is 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 offer, the most common type offered is a non-leveraged ESOP. This provides the most advantage to nearly everyone involved by promoting the growth of the company, incentivizing shareholders by providing liquidity if needed, and providing a tax-favored benefit to employees at no charge to them they can utilize 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 functions.
Additional ESOP Benefits for Companies and Employers
ESOP benefit offerings promote the employer contributing company to invest in its own success and provide a source of internal credit if the business happens to need liquidity. Contributions to fund the plan are always made in non-borrowed funds such as cash or stock contributions that are tax-deductible in most cases. The company’s newly issued stocks are evaluated, and the contributing company 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 attractive to the contributing company.
A Shareholder’s Benefit to Dealing with ESOPs
An ESOP provides shareholders with the benefit of investing in a business which may otherwise not be available. Since ESOP shares can easily be liquidated, the shareholder also benefits from having immediate access to their funds instead of having to accept a deferred payment arrangement. Shareholders may also profit 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’s 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 business offering an ESOP. With an ESOP, they get a benefit that doesn’t cost anything and provides a tax-deferred nest egg which can be used in retirement and even earlier in some scenarios. ESOP programs also allow for a lien or an estate to get the proceeds of sale at case of the employee passing away. ESOP plans benefit employees with a reasonable length of service that plan on remaining 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 before the employee’s anticipated retirement date. The employee can get cash if the company closes early and the taxes and associated penalties can 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 concerning 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 advantage is a fantastic choice 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 chance that an ESOP provides to diversify their portfolio. Employees appreciate the multi-purpose benefit that an ESOP provides for retirement and in situations where a safeguard is helpful. A professional attorney or tax professional is able to discuss the positives and negatives of ESOP plans and must be consulted with prior to investing in any ESOP or other financial product involving dangers.