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From Business Insider “An Employee Stock Ownership Plan is a retirement benefit that makes workers part owners of the company”
Written by Robin Kavanagh
If you’re looking to work for a company that values employees and gives you a real stake in its success, you might want to check out those that offer an employee stock ownership plan (ESOP).
An ESOP is a retirement program that makes employees part owners of the company. The National Center for Employee Ownership (NCEO) estimates that more than 14 million people participate in 6,600 ESOPs nationwide. While some publicly traded companies offer ESOPs, the plans are more common among privately held employers. Here’s a closer look at how ESOPs work and the advantages you could get by working for a company that provides this kind of benefit.
How does an ESOP work?
An ESOP is basically a trust fund a company establishes to purchase shares of stock from existing stockholders. Those shares are then allocated into accounts designated for individual employees, usually aligned with a percentage of their salary. The shares accumulate in the account until the employee retires, leaves the company, or some kind of special circumstance occurs, such as death or disability.
Employees usually don’t put any money into an ESOP. In most cases, the employer makes all contributions. Workers cash out by selling shares on the market or back to the employer. ESOPs are regulated under the Employee Retirement Income Security Act (ERISA). Privately held ones must have company stock independently appraised for its fair market value at least once per year.
Be careful not to confuse ESOPs with employee stock option plans, which give workers a chance to purchase shares in the company at a specified price within a fixed window of time, providing the chance to acquire them at a discount to the market price. Most ESOPs grant shares of stock to employees outright. In that case, if the value of those shares never rises, or even falls, the employee hasn’t lost anything by participating. The same is not always true for stock options.
“With stock options, employees pay cash for the stock either directly with cash on hand or indirectly by exercising the option and immediately selling enough shares to cover the exercise price,” explains Elliot Raff, Of Counsel at Keightley & Ashner LLP. “In an ESOP, employees ‘buy’ the stock allocated to their ESOP accounts by virtue of being and remaining employed and thereby becoming vested.”
Finally, Raff says ESOPS are subject to non-discrimination rules under ERISA and Internal Revenue Service regulations about annual limits on the value of allocations. Stock option plans are not, allowing companies to set their own rules for who benefits from this kind of program and how it will work.