What Is an Employee Stock Ownership Plan?
An employee stock ownership plan (ESOP) is a type of retirement plan that a company sets up by putting stock into the plan for the benefit of employees. Individual employees do not buy or own the stock.
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Background
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The popularity of ESOPs began increasing in 1974, and this type of employee ownership is now the most common in the United States. According to the National Center for Employee Ownership, about 11,000 companies have these plans, as of 2010.
Features
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A company establishes an ESOP by setting up a trust fund. The company may put shares or cash to buy shares into the fund and then count the value as a tax-deductible contribution. Sometimes the ESOP borrows money to buy shares and the loan is paid off with company contributions.
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Benefits
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Shares are allocated to employee accounts and, over time, an employee acquires a right to the shares. The company must buy the shares at fair market value when the employee leaves.
Time Frame
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The employee's right to the shares must vest, meaning the employee fully owns the shares, within three to six years.
Considerations
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Employees pay tax on the shares only when they are distributed.
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