An Employee Stock Ownership Plan (ESOP) is a benefit that’s typically offered by a privately held company to benefit itself, its shareholders, and its employees. With a deferred-tax advantage to workers, it’s also a highly sought after and coveted benefit that many employers use to attract new talent. ESOPs work best for a business that has an educated and diverse workforce that serves in a variety of roles. While there are different types of ESOP plans available to offer, the most common type offered is a non-leveraged ESOP. This provides the most benefit to almost everyone involved by encouraging the development of the business, incentivizing shareholders by providing liquidity if needed, and giving a tax-favored advantage to employees at no cost to them they can utilize in retirement or earlier. 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 Companies and Employers
ESOP benefit offerings promote the company contributing company to invest in its success and provide a source of internal charge if the company happens to need liquidity. Contributions to fund the plan are always made in non-borrowed funds like stock or cash contributions that are tax-deductible ordinarily. The company’s newly issued stocks are evaluated, 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 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 are easily liquidated, the shareholder also benefits from having immediate access to their funds rather than having to accept a deferred payment agreement. Shareholders may also profit from the sale of their shares to the ESOP to reinvest elsewhere as a way to defer taxation on any profits from the sale. It’s important to remember that this only applies in certain situations and it’s best to seek advice from 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 receive a benefit that does not cost anything and provides a tax-deferred nest egg which may be used in retirement and even earlier in some scenarios. ESOP plans also allow for a beneficiary or an estate to receive the proceeds of sale at case of the worker 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 give 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 business closes early and the taxes and associated penalties can be negated when rolled over to a qualified IRA plan. This is also true if the worker leaves the company by themselves 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.
Overall, an ESOP benefit is a great selection 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 situations where a safeguard is useful. A qualified attorney or tax professional can discuss the benefits and drawbacks of ESOP plans and must be consulted with before investing in any ESOP or other financial product involving risks.