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 employees. With a deferred-tax benefit 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 different types of ESOP programs available to provide, the most common type offered is a non-leveraged ESOP. This provides the most benefit to nearly everyone involved by encouraging the development of the business, incentivizing shareholders by providing liquidity if needed, and giving a tax-favored benefit 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 Companies and Employers
ESOP benefit offerings encourage the company contributing company to invest in its own success and provide a source of internal charge if the business happens to need liquidity. Contributions to finance the plan are always made in non-borrowed funds like cash or stock 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 Dealing with ESOPs
An ESOP provides shareholders with the benefit of investing in a business that might otherwise not be available. Since ESOP shares can easily be liquidated, the shareholder also benefits from having instant access to their funds rather than having to take a deferred payment arrangement. Shareholders may also benefit from the sale of their shares to the ESOP to reinvest elsewhere as a way to defer taxation on any profits from the sale. It’s important to remember that this only applies in certain scenarios and it’s best to consult with a tax attorney or accountant before 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 anything and provides a tax-deferred nest egg that may be utilised in retirement and even earlier in some scenarios. 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 workers with a reasonable period of support that plan on staying employed with the company until retirement. The increase the share’s value can give a rather lucrative retirement or safety net if the company closes prior to the employee’s anticipated retirement date. The employee can get cash if the company closes early and the taxes and associated 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 regarding the tax treatment, supply, and specifics of any ESOP plan should be reviewed by a qualified attorney or accountant prior to making any transactions.
In general, an ESOP advantage is a great 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 provides to diversify their portfolio. Employees appreciate the multipurpose benefit that an ESOP provides for retirement and in circumstances where a safeguard is helpful. A qualified 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 between dangers.