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What is an ESOP?

An Employee Stock Ownership Plan (ESOP) enables employees to own stock in the company that employs them.

ESOPs are a retirement plan that is allowed under federal law.

Like 401(k)s, an ESOP is a defined contribution plan: Employers contribute a defined amount to the plan on behalf of employees, and returns on that investment are not guaranteed.

Unlike a 401(k), an ESOP is designed to invest primarily in the stock of the employer.

Typically, business owners set up an ESOP by selling some or all of their shares to an ESOP trust. Participating employees’ accounts are credited with shares of stock, according to a set formula. The account balances for employees represent their beneficial ownership in the company.

An ESOP is unique among qualified employee benefit plans in its ability to borrow money. As a result, "leveraged ESOPs" may be used as a technique for corporate finance.