What is an ESOP?
An Employee Stock Ownership Plan (ESOP) is a tax-qualified retirement plan authorized and encouraged by federal tax and pension laws.
ESOPs are similar to—and governed by some of the same laws and regulations as—401(k) plans. In other ways, however, ESOPs are quite different from 401(k)s.
When companies launch an ESOP, they form a trust that purchases some or all the company’s shares and holds these shares in retirement accounts for employees. When the stock value increases or decreases, so does the value of employees’ accounts.
Unlike 401(k)s, most ESOPs require no out-of-pocket contribution from employees. For employees who feel hard pressed to make an out-of-pocket contribution to a 401(k), an ESOP might be the only plan in which they can afford to participate.
10.6 million employees
participate in ESOPs, more than the entire workforce of the U.S. auto industry.
in value is held by employee owners in ESOP companies, an average of $129,521 per employee.
across the nation have an ESOP.
ESOPs, unlike 401(k)s and most other retirement plans:
- Are legally required to invest primarily in the stock of the sponsoring employer.
- Are trusts that hold shares of the business for employees, making them beneficial owners of the company.
- Can provide tax benefits to the company and to the exiting owner(s).
- Can borrow money from related parties to finance company projects—including the tax-advantaged purchase of the company’s shares of stock.
Not Just a Retirement Plan
In simplest terms, an ESOP is a retirement plan. In reality, it is so much more than that:
ESOPs provide unique benefits to the employee owners, the institutions, and the surrounding communities that they are involved with. ESOPs have been proven to motivate employees, increase productivity, improve employee retention, excel at providing employee training, keep jobs local, counter wealth inequality, contribute to business health and longevity, and so much more.
Who Benefits from ESOPs?
Retain a company—including its jobs, products, services, and economic contributions. By contrast, new buyers often move or shutter companies, or lay off employees—all of which has a negative impact on rural and urban economies alike.
Get a company that is more likely to stay in business through tough times.
Get a company that is more likely to retain employees. (When employees work, they contribute to the local economy and don't draw unemployment benefits.)
May be able to delay or even eliminate capital gains taxes incurred from selling stock to an ESOP.
Can exit the company on their timeline. Owners can sell all their shares at once, or some portion of their shares on the schedule of their choosing.
Can remain employed at the company after selling all their shares.
Can find a willing, qualified buyer when these may be scarce.
Can keep alive the culture and company they founded or developed (rather than having another company tear it down).
Get a retirement plan that typically requires no out-of-pocket contribution from them. (ESOPs can be particularly beneficial for those who cannot afford a payroll deduction to a 401(k) plan.)
Share in the rewards when the company performs well.
Enjoy greater job stability. Those who work at companies with employee stock ownership are 6.2 times less likely to be laid off than those at conventionally owned companies.
Often have access to two retirement plans. (Many employees at conventionally owned businesses do not have access to even one employer-sponsored retirement plan.)
Increased transparency and financial literacy. Employees at ESOP companies typically receive more company financial information than those in conventionally owned firms.
May be able to avoid paying federal and even state income tax on the portion of the business owned by the ESOP.
May be able to take a tax deduction on dividends paid on ESOP stock.
Can use an ESOP for tax beneficial financing, in which no taxes are paid on the principal or interest on the loan.
May be more likely to withstand tough economic times.
Can enjoy business continuity since employees, who know the business and customers best, remain and provide uninterrupted products and services.
Offer a benefit that aligns employees’ interests with the company’s long-term financial health.
Get a concise overview of the benefits ESOPs provide and what it takes to set one up.
Get a quick overview on what is involved in establishing an ESOP at your company.
Find out how ESOPs provide tax advantages to C and S corporations.
Want More Information?
Companies that are considering an ESOP, have an ESOP, or provide services to ESOPs are all encouraged to join our engaged, passionate community. The best information you can get is from other ESOPs that are on the same journey.
If you are a reporter working on a story or simply want to learn more about ESOPs, reach out and we will be happy to share information and research, connect you to our members, and provide interviews.