FAQs

Frequently Asked Questions About ESOPs and Employee Ownership

  1. What is an ESOP?
    An ESOP, or employee stock ownership plan, is a tax qualified deferred compensation employee benefit which makes the employees of that company beneficial owners of stock in that company.
    ESOPs are unique in that only ESOPs are required under US tax and labor laws to invest primarily in the securities of the sponsoring employer and the only employee retirement savings plan that law permits that may use borrowed funds to acquire its asset, the employer securities.
  2. How are ESOPs used?
    The most common uses of ESOPs are to buy the stock of a retiring owner in a closely held company and as an extra employee benefit or incentive.
    Other companies have used ESOPs as a technique of corporate finance to help finance an expansion, make an acquisition, spin off a division, or take a company private.
    In a very small percentage, approximately 2 percent, ESOPs have been used to buy out an existing firm that would have otherwise closed.
  3. What is a leveraged ESOP?
    In a leveraged ESOP, the ESOP or its corporate sponsor, borrows money from a bank or other qualified lender. The company usually gives the lender a guarantee that it will make contributions to the trust which enables the trust to amortize the loan on schedule; or, if the lender prefers, the company may borrow directly and make a loan back to the ESOP. If the leveraging is meant to provide new capital for expansion or capital improvements, the company will use the cash to buy new shares of stock in the company. If the leveraging is being used to buy out the stock of a retiring owner, the ESOP will acquire those existing shares. If the leveraging is being used to divest a division, the ESOP will buy the shares of a newly created shell company, which will in turn purchase the division and its assets. ESOP financing can also be used to make acquisitions, buy back publicly-traded stock, or for any other corporate purpose.
  4. Why should employee ownership be national public policy?
    ESOPs (employee stock ownership plans) make employees beneficial owners in the companies they work for. By doing so, as study after study has shown, ESOPs improve the productivity and profitability of the firms which sponsor them. They also provide considerable wealth to their participants when those participants leave the firm or retire. A national policy on employee ownership would help develop employee ownership policies that are best for the changing nature of work, and economic policies of the 21st century.
  5. What is Employee Ownership Month?
     For over 13 years, The ESOP Association and its member companies have been celebrating Employee Ownership Month every October. It is a celebration of the incredible spirit of employee ownership and an opportunity to educate employee owners about the tremendous benefits of employee stock ownership plans (ESOPs).
    It is also an opportunity to educate the public, elected officials, and the media as to why employee ownership through ESOPs is good public policy.
    Companies celebrate with picnics to honor their employee owners, hold roundtable discussions with local public officials and organizations to spread the word about employee ownership, and some hold awards ceremonies to honor outstanding employees.