An Employee Stock Ownership Plan (“ESOP”) allows the employer to pass all or a portion of the ownership of the company to the employees on a tax deferred basis.

The company will contribute either shares of stock in the company or cash to purchase shares of stock of the company to the plan. The company must be either a C Corporation or S Corporation for this plan type of plan to be available.

How does an ESOP work?

A current shareholder or the company will sell current shares of corporate stock, typically common stock, to the ESOP. If the plan does not have enough available cash to purchase the shares of stock for sale, the plan can borrow the money to purchase the shares of stock. This type of plan is called a leveraged ESOP.

Non-leverage ESOPs are the easiest plan to administer because the plan maintains enough cash to purchase the shares of stock available for purchase. Leverage ESOPs are more difficult to administer because the shares of stock are released based on the payments being received by the previous shareholder on the note between the previous shareholder and the ESOP.

In addition to the accounting of the purchased shares of stock and any dividends on that stock, the plan also is required obtain an independent value of the company stock each year. This share price is easily obtained for a company that is traded on the stock exchange. For a company that is not traded on the stock exchange, an independent appraisal of the company is required each year.

Although an ESOP can be very beneficial for a company and its employees, it does have many complexities.

How much can an employer contribute to an ESOP?

An employer is allowed to contribute the greater of the amount required to satisfy the current loan payments on a leveraged ESOP or 25 percent of the total eligible compensation for the plan. These contributions must be contributed no later than the due date of the company’s tax return including extensions. Any contributions made to the plan will be allocated to the employees’ accounts on a pro rata method and the contributions will grow tax deferred until the employee receives a distribution from the plan.

How does an employee receive their money from the plan?

Employees can receive a distribution from the plan in a number of ways. Funds can be received via plan loans, hardship distributions, in-service distributions, required minimum distributions or distributions due to termination or retirement. Of course, the preferred distribution would be due to retirement. The provisions of the plan set forth by the employer will explain the options for receiving a distribution from the plan.

What is required to administer an ESOP?

An ESOP is required to have a written plan document. This document is drafted by your third party administrator or attorney and executed by the company. In addition to the plan document, the plan is required to file a Form 5500 electronically each year with the Department of Labor. If the plan has participants in excess of 100, then the plan is required to be audited by an independent auditor. The report provided to the plan by the independent auditor must be included with the Form 5500 filing.

What are the first steps to getting an ESOP started?

If you are interested in exploring an ESOP, please contact Resource Benefits Administrators at (254) 776-6214 or (512) 342-1652 and a representative will assist you with your questions and the procedures needed to get your plan established.

3415 Greystone Drive, Suite 205
Austin, Texas 78731
(512) 342-1652
5400 Bosque Blvd, Suite 500
Waco, Texas 76710
(254) 776-6214

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