Employee stock ownership plans encourage employees to perform at the top of their abilities by making them part owners of the company If the plan is structured properly, it can qualify as an Employee Stock Ownership Plan. ESOPs offer many benefits under federal law, including significant tax benefits. Over 11,000 companies offer ESOP plans to their employees. Many other employers offer non-ESOP employee stock plans.
An ESOP Must Be Structured Properly
To qualify as an ESOP under federal law, the plan must specifically identify itself as an ESOP. The terms of an ESOP must be put into writing. Employees must be provided with copies of the plan within 90 days after they join it. To set up an ESOP, employers must establish a trust fund and fund it with either employer stock or cash to purchase employer stock. The company must appoint someone to administer these assets for the benefit of the employees.
ESOPs Offer Tax Advantages
The IRS offers many tax benefits to employers who establish ESOPs. For example, employer contributions to ESOPs, whether in the form or stock or cash, are tax-deductible within certain limits. If the ESOP takes out a loan to purchase company shares, ESOP contributions used to repay the loan are also tax-deductible. If the employer is an S corporation, corporate shareholders are not taxed on any assets held by the ESOP. Many state tax authorities offer similar tax benefits to ESOPs.
ESOPs Have Disadvantages
To the extent that the company issues new shares to fund the ESOP, the ownership percentage of existing shareholders may decrease. Employee shareholders must also be given the right to vote their shares, which reduces the relative voting power of existing shareholders. Furthermore, issuing new shares and transferring ownership to the ESOP trust fund requires that the company comply with federal regulations, which can be expensive. To afford to fund the ESOP, the company may have to take money from other programs, such as 401(k) plans.
Employee Stock Plans Don't Have to Be ESOPS
If the stock plan doesn't qualify as an ESOP, it won't enjoy ESOP tax benefits. Nevertheless, a non-ESOP employee stock plan may suit the needs of individual companies. Non-ESOP options include allowing employees to buy company stock directly, distributing stock to employees directly as a bonus, offering stock options (the right to purchase company stock at a certain price), or offering stock as a part of an employee profit-sharing plan. Some companies form employee-run cooperatives to manage employee-owned assets.
A Lawyer Can Help
The law surrounding the creation and management of employee stock plans is complicated. Plus, the facts of each case are unique. This article provides a brief, general introduction to the topic. For more detailed, specific information, please contact an employment or employee benefits lawyer.