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 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 company 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 advantage to nearly everyone involved by promoting the development of the company, incentivizing shareholders by providing liquidity if necessary, and providing a tax-favored benefit to employees at no charge to them that 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 encourage 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 finance the plan are constantly made in non-borrowed funds like stock or cash 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 obligation 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 company that might otherwise not be available. Since ESOP shares can easily be liquidated, the shareholder also benefits from having immediate access to their funds rather than having to take a deferred payment agreement. Shareholders may also benefit 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 note that this only applies in certain scenarios and it’s 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 business offering an ESOP. With an ESOP, they receive a benefit that doesn’t cost anything and provides a tax-deferred nest egg which may be used in retirement and even earlier in some situations. ESOP plans 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 fair length of service that plan on staying 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 before the employee’s expected retirement date. The employee can receive cash if the company closes early and the taxes and related penalties could be negated when rolled over to a qualified IRA plan. This is also true when the employee leaves the company on their own or is terminated. Specifics regarding the tax treatment, supply, and specifics of any ESOP plan ought to be reviewed by a qualified attorney or accountant before making any transactions.
Overall, an ESOP benefit is a fantastic 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 situations where a safeguard is helpful. A qualified attorney or tax professional is able to discuss the benefits and drawbacks of ESOP plans and should be consulted with prior to investing in any ESOP or other financial product involving dangers.