Employee Stock Ownership Plans (ESOPs)

How These Plans Work
  • ESOPs were created to foster the ownership of companies by employees
  • Assets of an ESOP must be invested primarily (51% or more) in stock of the employer sponsoring the plan with distributions generally made in employer stock
  • Employees who have participated in an ESOP for at least 10 years and who are at least age 55 must be permitted to diversify a portion of their accounts out of employer stock over a period of 6 years or less
  • ESOPs can borrow money to purchase shares of employer stock or even to buy out the owner(s) of the company; the stock purchased become collateralized shares for the loan
  • Each year the sponsoring employer makes a contribution to the ESOP to pay off part of the loan
  • As the loan is repaid, a portion of the collateralized shares are released in accordance with a stated formula
  • The released shares are allocated to participants’ accounts on the basis of their pay; coordination with Social Security is not permitted in the allocation
  • Voting rights on allocated shares must generally be passed through to participants
Things To Note
  • Companies that are not publicly traded (i.e., “closely held”) must have an outside appraiser value the company’s stock annually and generally must provide terminated employees with a put option allowing them to sell any distributed shares back to the company within a prescribed time period
  • Special rules govern buy back arrangements and permit some delays in making distributions
  • With respect to closely-held companies, voting rights must be passed through to participants with regard to certain corporate issues
What We Can Do
  • Evaluate your objectives and recommend possible plan designs
  • Consult with you on regulatory changes and emerging trends
  • Perform annual coverage testing to ensure that the plan provides adequate coverage to non-highly compensated employees
  • Perform stock repurchase liability analysis to assist management in quantifying estimated future costs associated with buying back stock
  • Assist in vendor searches to find appropriate service providers for your plan
  • Help with employee communications, including communication materials, employee meetings and workshops
  • Prepare plan documents, plan amendments, and required communications to employees
  • Assist in qualifying your plan with the IRS, including preparation of IRS submissions
  • Provide administration for your plan – daily valuation or traditional recordkeeping, process loans and distributions, including preparation of required governmental information returns related to distributions from the plan
  • Prepare the annual 5500 return/report required by the IRS, including any necessary interface with the plan’s independent auditors
  • Assist you with any IRS or DOL audit of your plan