Employee stock ownership plan ESOP

What does Employee stock ownership plan ESOP mean?

An employee stock ownership plan (ESOP) is a retirement plan in which companies contribute stock into the employee's retirement plan for the benefit of the employee. Contributed shares may not be "vested" for a specific amount of time, but when they do become vested the employee is entitled to receive them. The shares of stock are only distributed, however, after the retirement, termination, or death of the employee.

Employee Stock Ownership Plans are monitored by the U.S. Department of Labor's Employee Benefits Security Administration, and they must follow the same eligibility rules, vesting mandates, and other requirements the IRS sets for retirement plans. If you have questions about your company's plan you can contact the EBSA by calling Toll-Free: 1-866-444-EBSA (3272). Complaints can also be filed about your ESOP by visiting the EBSA's website. More complicated complaints can be discussed with a pension lawyer.

Benefits of ESOP

The primary benefit of an ESOP are the significant tax breaks offered by the Federal Government for such plans. For example, a company can borrow money through the ESOP and pay the loan obligation by making tax-deductible contributions to the ESOP. Companies also hope that employees will become more productive and loyal, behaving "like owners," if they have a tangible stake in the company. Finally, an ESOP allows the company to provide increased compensation through cash-based profit sharing arrangements, which can provide the opportunity for better recruitment, retention, and motivation.

Keep in mind, an ESOP is not the same as an employee stock option program which allows employees to purchase a company's stock at a set price within a certain period of time.

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