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 employees, it’s 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 functions in many different roles. While there are different types 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 fall under the Employee Retirement and Income Security Act of 1974 (ERISA) for IRS tax code purposes.
Additional ESOP Benefits for Businesses and Employers
ESOP benefit offerings encourage the employer contributing company to invest in its success and provide a source of internal credit if the company happens to need liquidity. Contributions to fund the plan are always made in non-borrowed funds like cash or stock contributions that are tax-deductible ordinarily. The company’s newly issued stocks are evaluated, 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 duty are the primary motivating factors which produce non-leveraged ESOP benefits appealing to the contributing company.
A Shareholder’s Benefit to Dealing with ESOPs
An ESOP provides shareholders with the benefit of investing in a company which may otherwise not be available. Since ESOP shares are easily liquidated, the shareholder also benefits from having immediate access to their funds instead of having to accept a deferred payment agreement. 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 note that this only applies in certain situations and it is best to seek advice from a tax attorney or accountant prior to buying 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 receive a benefit that does not cost them anything and supplies a tax-deferred nest egg which can be utilised in retirement and even earlier in some situations. ESOP plans also allow for a beneficiary or an estate to receive the proceeds of sale at case of the worker passing away. ESOP plans benefit employees with a reasonable length of support 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 prior to the employee’s anticipated retirement date. The employee can receive 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 when 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 an experienced attorney or accountant prior to making any transactions.
In general, an ESOP advantage is a fantastic selection 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 chance that an ESOP offers to diversify their portfolio. Employees appreciate the multi-purpose benefit an ESOP provides for retirement and in situations where a safeguard is useful. A professional attorney or tax professional can discuss the positives and negatives of ESOP plans and should be consulted with before investing in any ESOP or other financial product involving risks.