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 own employees. With a deferred-tax benefit 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 business which has an educated and diverse workforce that functions 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 encouraging 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 that they can utilize in retirement or sooner. 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 promote the company contributing company to invest in its own success and provide a source of internal credit 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 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 fund the contributions held in the ESOP trust. Improved cash flow and a reduced tax obligation are the primary motivating factors that produce non-leveraged ESOP benefits appealing to the contributing business. 

A Shareholder’s Benefit to Investing with ESOPs

An ESOP provides shareholders with the benefit of investing in a business which may otherwise not be accessible. 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 arrangement. Shareholders may also profit from the sale of the shares to the ESOP to reinvest elsewhere and be able to defer taxation on any profits from the sale. It’s important to remember that this only applies in certain situations and it is best to consult with a tax attorney or accountant before 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 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 the event of the employee passing away. ESOP plans benefit employees with a fair length of service 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 company closes prior to the employee’s anticipated retirement date. The employee can receive cash if the business closes early and the taxes and related penalties could be negated when rolled over to a qualified IRA plan. This is also true if the employee leaves the firm on their own or is terminated. Specifics regarding the tax treatment, supply, and specifics of any ESOP plan should be reviewed by a qualified attorney or accountant prior to making any transactions.

ESOPs Summarized

In general, an ESOP benefit 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 chance that an ESOP offers 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 benefits and drawbacks of ESOP plans and must be consulted with before investing in any ESOP or other financial product involving dangers.

Paul Petersen