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 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 business which has an educated and diverse workforce that serves 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 almost everyone involved by encouraging the development of the business, 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 fall under the Employee Retirement and Income Security Act of 1974 (ERISA) for IRS tax code functions.

Additional ESOP Benefits for Businesses and Employers

ESOP benefit offerings promote the company contributing company to invest in its success and provide a source of internal charge if the business happens to need liquidity. Contributions to finance 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 obligation are the primary motivating factors that produce non-leveraged ESOP benefits appealing to the contributing business.

A Shareholder’s Benefit to Dealing with ESOPs

An ESOP provides shareholders with the benefit of investing in a business that might 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 take a deferred payment arrangement. Shareholders may also benefit from the sale of their 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 scenarios and it’s best to seek advice from a tax attorney or accountant prior to purchasing 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 doesn’t cost anything and supplies a tax-deferred nest egg which can be used in retirement and even earlier in some situations. ESOP plans also allow for a beneficiary or an estate to get the proceeds of sale in the event of the employee passing away. ESOP plans benefit workers with a reasonable length of support 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 business closes prior to 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 if the worker leaves the company by themselves or is terminated. Specifics concerning the tax treatment, supply, and specifics of any ESOP plan should be reviewed by a qualified attorney or accountant before making any transactions.

ESOPs Summarized

In general, an ESOP benefit is a great choice for businesses 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 offers to diversify their portfolio. Employees appreciate the multi-purpose benefit an ESOP provides for retirement and in circumstances where a safeguard is useful. A qualified 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 risks.