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Employee Stock Ownership Plans
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Employee Stock Ownership Plans (ESOPs) are retirement plans similar to profit sharing plans. Unlike Profit Sharing Plans, however, they allow employers to share or transfer company ownership to employees. ESOPs can be a great employee benefit and can help to promote an ownership culture among employees.
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How ESOPs Work
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Discretionary contributions.
401(k) plans are a disciplined
and convenient way to help
employees save, allowing them to
plan for a secure retirement.
The ESOP can be used to enhance
employee deferral contributions
to the 401(k) plan, whether or
not it is part of the ESOP. The
employer can make discretionary
contributions to the ESOP,
either as a matching 401(k)
contribution or as a
discretionary “profit sharing”
contribution. |
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Shares of stock allocated to employees.
Instead
of making cash contributions to the
ESOP, the employer can make
contributions in the form of stock;
which increases cash flow of the
company.
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| Employees share in company growth.
As
the worth of the company increases (or
decreases), employees share in the
company’s value. In turn, the employees
have a bigger stake in the profitability
of the company and the develop a “drive”
to want to help it succeed. |
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Vesting. ESOP contributions can be subject to a vesting schedule requiring employees to work up to 5 years before becoming fully vested.
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Distributions. Upon an employee's termination or retirement, company stock is generally repurchased by the ESOP at fair market value and a cash disbursement is made to the participant.
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Leveraged ESOPs
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ESOP loan. Unlike traditional profit sharing plans, an ESOP is allowed to borrow money to purchase shares of stock. The loan can be structured in a number of ways, but it is generally secured by the company or majority shareholders.
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| Loan repayments.
Employers make tax deductible contributions to the ESOP to repay the loan. Both principal and interest are tax deductible.
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ESOP Uses
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| Purchase shares of departing owner. Owners of closely-held businesses can use an ESOP to create a market for their shares. This can be done through cash contributions from the company or by having the ESOP borrow money to purchase shares. |
| Borrow money at low after-tax cost. An ESOP borrows funds and receives tax deductions for the loan repayments and interest making the after-tax cost lower than traditional loans. |
| Great employee benefit. ESOPs can be a great employee benefit and can help to align employers' and employee's interests. |
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DAILY RECORDKEEPING
July offers a fully integrated Daily Recordkeeping trading platform with customized tools for participants, plan sponsors, and investment advisors. For more information and to demo our website, visit the Daily RK Website.
PAYROLL SERVICES
July offers complete payroll outsourcing, including direct deposit, complete tax management services, and full integration with your retirement plan. A single provider for retirement and payroll services reduces your work load and increases satisfaction.
FRINGE BENEFIT SERVICES
July has been a leader in the design, implementation and administration of a wide range of flexible benefit programs.
RESOURCE CENTER
The plan resource center provides helpful access to important
information including plan limits, plan features, terminology, and tips to avoid mistakes.
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