Employee Stock Ownership Plan
An Employee Stock Ownership Plan (ESOP) is a plan in which a company contributes shares of its stock on behalf of its employees, who then vest in the account and thereafter can receive the benefit typically when they leave the company.
An ESOP is established when the company borrows money from a financial institution, using its stock as security or collateral for the loan. Over a prescribed period of time, the company repays the loan. Principal and interest loan repayments are tax-deductible. With each loan repayment, the lending institution releases a certain amount of stock being held as security. The stock is then placed into an employee stock ownership trust (ESOT) for distribution at no cost to all employees. The employees receive the stock upon retirement or separation from the company.
An ESOP enables a company to provide an additional productivity incentive for its employees through a tax-deferred retirement benefit. In addition, an ESOP can be used in conjunction with the company's 401(k) Plan. ESOP participants may also have a right to vote on major business issues.
Key Provisions
- A type of qualified employee benefit plan with tax-deferred growth.
- Company sets up a trust fund for employees.
- Company contributes cash or shares to the trust, with stock held as collateral.
- Company can borrow money to buy shares, repaying the loan with contributions to the trust; within limits, company contributions to trust are tax-deductible.
Advantages
- Serves as a tangible reward for efforts without using liquid cash resources.
- Allows employees to share in the future growth of the Company.
- Employees not subject to taxation until shares are distributed.
- Provides a tax-deductible benefit that ties employees to the Company.
To find out more on how
Compensation Resources, Inc. can help your company with
Employee Stock Ownership Plans , please
contact us or call us directly to speak with our compensation consultants at
877-934-0505.
