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Setting up an ESOP can take time and is a fairly complicated chore. Setting up an ESOP for a publicly traded company is different than setting one up for a private company.
Companies with publicly traded securities can enact an ESOP by working with an attorney to draft the plan and the trust that will hold the plan assets. All ESOP plans must comply with IRS retirement plan guidelines such as 401(a) and ERISA, and newly established plans are submitted to the IRS with Form 5300.
When a privately held company is setting up an ESOP, the company has some additional steps to take. The company must first be valued by a CPA to establish the cost basis and tax implications of enacting an ESOP. Also, the effect of the ESOP on current owners must be taken into account, as an ESOP will likely dilute their ownership interest.
Once the plan and trust document are in place, the stock of the company must be transferred into the trust before the end of the year, so that the company can report the transaction on its year-end tax return. -
Each ESOP will have some details that must be sorted out before enacting the plan. The first such detail is the picking of trustees. All ESOPs are governed by trustees that have a fiduciary duty to administer the trust and oversee the plan. Trustees are typically upper management in the company.
Each company needs to determine how to allocate the shares to each employee. Some companies look at years of service, while others look at annual compensation. These factors and others can be combined into an allocation formula to divide up the stock into each employee's account. Once the allocation formula is determined, a vesting formula also must be created. This formula will determine how the employees' share value will be calculated upon leaving the plan.
