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Employee Stock Ownership Plan (ESOP)
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| HRDM.net By From
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Employee Stock Ownership Plan (ESOP): An ESOP is a defined contribution employee benefit plan that allows employees to become owners of stock in the company they work for. It is an equity based deferred compensation plan. Several features make ESOPs unique as compared to other employee benefit plans. First, only an ESOP is required by law to invest primarily in the securities of the sponsoring employer. Second, an ESOP is unique among qualified employee benefit plans in its ability to borrow money. As a result, "leveraged ESOPs" may be used as a technique of corporate finance.
How does ESOP work?
1. The ESOP operates through a trust, setup by the company, that accepts tax deductible contributions from the company to purchase company stock.
2. The contributions made by the company are distributed to individual employee accounts within the trust.
3. The amount of stock each individual receives may vary according to pre-established formulas based on salary, service, or position.
4. The employees may cash out? after vesting in the program or when they leave the company. The amount they may cash out may depend on the vesting requirements.
5. When an ESOP employee who has at least ten years of participation in the ESOP reaches age 55, he or she must be given the option of diversifying his/her ESOP account up to 25% of the value. This option continues until age sixty, at which time the employee has a one-time option to diversify up to 50% of his/her account. This requirement is applicable to ESOP shares allocated to employee's accounts after December 31, 1986.
6. Employees receive the vested portion of their accounts at either termination, disability, death, or retirement. These distributions may be made in a lump sum or in installments over a period of years. If employees become disabled or die, they or their beneficiaries receive the vested portion of their ESOP accounts right away.
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