Employee stock ownership plans or (ESOPs) allow employees the option to save a percentage of their wages on a tax deferred basis to invest in employer stock. Employers can then include a certain amount of company stock in the total compensation package for each qualified employee. ESOPs can take many forms, with stock options and restricted stock units (RSUs), being common.
These plans are qualified, defined contribution plans. Another example of a qualified, defined contribution plan is a 401(k) because it allows employees to contribute a portion of their wages on a tax deferred basis, like an ESOP. However, 401(k) participants generally invest in target date funds along with low cost exchange traded funds, in comparison to ESOP participants which invest in employer stock. All qualified plans like Employee Stock Ownership Plan and 401(k)s are also protected by ERISA, which protects employees from losing their funds in case a company should fail.
By including company stock as part of an employee’s compensation, employees may feel more motivated to work and support a company’s best interest and long-term goals. Many employees will be more likely to work at a company longer, if they believe their shares will greatly appreciate in the future.
Employees and employers will benefit from tax deductible contributions. Employers can use tax deductible contributions to build an ESOP’s reserves or buy shares from current owners.
Dividends used to repay ESOP loans are tax deductible and can even be transferred to employees. Also, an ESOP plan can finance the purchase of new, existing or treasury shares with any type of use being tax deductible.
Employees will still have to pay taxes on the distributions they take from their plans. However, these will be at favorable capital gains rates, instead of higher ordinary tax rates. Employees should be aware of the 10% penalty if they take distributions prior to age 59 and a half.
While your business should consult with a specialized employee benefits lawyer, here are a few situations in which an ESOP makes sense for your business.
Brucker & Morra can help employers determine many factors like who will participate in the plan, voting rights, contribution rights and vesting schedules. We can help design, write and implement an ESOP to work for your business.
With decades of experience, we can properly consult with your business and designated trustee to help coordinate your ESOP with other benefit plans. If you’re going through a transition, succession or restructuring, our specialized ERISA law firm’s ESOP Attorney can help.
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