An Employee Stock Ownership Plan (ESOP) is a benefit that is typically offered by a privately held firm to benefit itself, its shareholders, and its own employees. With a deferred-tax benefit to employees, it is also a highly sought after and coveted benefit that many employers 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 different types of ESOP programs available to offer, the most common type offered is a non-leveraged ESOP. This provides the maximum benefit to nearly everyone involved by encouraging the growth of the business, incentivizing shareholders by providing liquidity if necessary, 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 functions.
Additional ESOP Benefits for Companies and Employers
ESOP benefit offerings encourage the company contributing company to invest in its success and provide a source of internal credit if the business happens to need liquidity. Contributions to finance the plan are always 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 finance the contributions held in the ESOP trust. Improved cash flow and a reduced tax obligation are the primary motivating factors that make non-leveraged ESOP benefits appealing to the contributing business.
A Shareholder’s Benefit to Investing with ESOPs
An ESOP provides shareholders with the advantage of investing in a business that might otherwise not be accessible. Since ESOP shares can easily be liquidated, the shareholder also benefits from having immediate access to their funds rather than having to accept a deferred payment agreement. Shareholders may also benefit 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 consult with a tax attorney or accountant before 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 does not cost anything and supplies a tax-deferred nest egg that may be utilised 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 the event 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 provide a rather lucrative retirement or safety net if the company closes before the employee’s expected 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 employee leaves the company on their own or is terminated. Specifics regarding the tax treatment, distribution, and specifics of any ESOP plan ought to be reviewed by an experienced attorney or accountant before making any transactions.
In general, an ESOP benefit is a fantastic selection for companies that wish to have choices 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 multipurpose benefit an ESOP provides for retirement and in circumstances 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.