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 own 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 company that has an educated and diverse workforce that functions in many different roles. While there are various sorts of ESOP programs available to provide, the most common type offered is a non-leveraged ESOP. This provides the most benefit to almost everyone involved by promoting the growth of the company, incentivizing shareholders by providing liquidity if necessary, and giving a tax-favored advantage to employees at no cost to them that they can use in retirement or earlier. 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 Businesses and Employers
ESOP benefit offerings promote 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 fund the plan are constantly made in non-borrowed funds like stock or cash contributions that are tax-deductible in most cases. The company’s newly issued shares are appraised, 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 duty are the primary motivating factors which make non-leveraged ESOP benefits appealing to the contributing company.
A Shareholder’s Benefit to Investing with ESOPs
An ESOP provides shareholders with the benefit of investing in a company 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 accept a deferred payment agreement. Shareholders may also profit from the sale of the shares to the ESOP to reinvest elsewhere as a way to defer taxation on any gains from the sale. It’s important to note that this only applies in certain situations and it is best to seek advice from 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 doesn’t cost them anything and supplies a tax-deferred nest egg that may be utilised in retirement and even earlier in some scenarios. ESOP plans also allow for a lien or an estate to receive the proceeds of sale in the event of the employee passing away. ESOP plans benefit employees with a reasonable period 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 business closes before the employee’s expected retirement date. The employee can get cash if the business closes early and the taxes and related 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 should be reviewed by a qualified attorney or accountant prior to making any transactions.
In general, an ESOP benefit is a fantastic selection for businesses that wish to have choices 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 multi-purpose benefit an ESOP provides for retirement and in circumstances where a safeguard is helpful. A professional attorney or tax professional can discuss the benefits and drawbacks of ESOP plans and should be consulted with before investing in any ESOP or other financial product involving risks.