Employee Stock Ownership Plans

What is an Employee Stock Ownership Plan - ESOP ?

An employee stock ownership plan, or ESOP for short, is a stock bonus plan that invests corporate profits back into the stock of sponsoring employer by rewarding employees with company stock.  An ESOP is a qualified plan and therefore, provides special tax benefits to the sponsoring employer, plan participants, and even the shareholder who sold the shares which were made available to the ESOP.

ESOPs are defined contribution plans which consist of a stock bonus plan or a hybrid which has a combination of a stock bonus plan and a money purchase pension plan

Employee stock ownership plans keep the employees focused on bettering the company and thus, becomes a win-win proposition for all parties involved.  

What are the Contribution Limits in an ESOP?

The ESOP is similar to a profit sharing plan or a money purchase pension plan in that it caps the employee benefit out at the lesser of the following two; 25% of their annual salary or $45,000.

When can I Withdraw the Funds in my ESOP?

In most cases, employer ESOP contributions vest 100% after 5 years.  This would mean that the employee would be able to sell 20% of the contribution every year for 5 years.

Alternatively, vesting can occur based on the number of years of employment with that company.  Some companies will mandate that the employee be with the firm for at least 3 years before vesting can begin.  Make sure you check with your HR resources to understand your entitlement.

If for some reason, you leave your employer before full vesting takes place, you will forfeit the unvested portion of your ESOP account.

What happens to my ESOP in the Unfortunate case of my Death?

In the case of an untimely death, the ESOP balance becomes 100% vested and withdrawal is allowed by the designated beneficiary that you set on the account.

Tim Ord
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