More Information About ESOPs
An employee stock ownership plan (ESOP) is an employee-owned structure providing employees an ownership interest in the employer sponsoring the plan.
The ownership interest can range from a small minority interest to 100% of the employer’s stock, depending on the objectives of the employer and its stockholders.
An ESOP is a tax-qualified retirement plan, specifically a defined contribution plan, and is governed by both IRS and U.S. Department of Labor rules and regulations. The IRS naturally is interested in the taxation issues involving the creation and administration of the plan, while the Department of Labor seeks to ensure that the employee participants of the plan are treated fairly and are well represented.
Three reasons a company may desire to establish an ESOP:
1| To provide a way for departing owners of the company to sell their stock shares in a tax-efficient manner.
– An ESOP is designed as a long-term investor, not a buyer that intends to own the employer for a short time and then sell.
– If the ESOP purchases 30% or more of the stock of a C corporation, the selling owner can choose to defer taxation on the sale of stock to the plan if he reinvests the proceeds in qualifying replacement securities.
2| To enhance the esprit de corps of the employer by providing a meaningful retirement benefit to employees and making them part owners.
3| To create a means to borrow funds for financing its purchase of employer securities in a tax-preferred manner.