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What is an ESOP?

 

An employee stock ownership plan (ESOP) is a retirement plan—in some ways similar to and governed by the same laws and regulations as a 401(k). In other ways, ESOPs are quite different from 401(k)s.

When companies launch an ESOP, they form a trust that purchases some or all of the company’s shares and holds these in retirement accounts for employees. When the stock value increases or decreases, so does the value of employees’ accounts.

ESOPs have a unique structure (there is no truly comparable plan anywhere, in any country) that enables them to provide unique benefits to the people and institutions listed below. 

(Note: Not all benefits are available in all situations.)

Who Benefits from ESOPs?

Communities

  • Retain a company—including its jobs, products, services, and economic contributions. By contrast, new buyers often move or shutter companies, or lay off employees—all of which has a negative impact on rural and urban economies alike.
  • Get a company that is more likely to stay in business through tough times.
  • Get a company that is more likely to retain employees. (When employees work they contribute to the local economy and don't draw unemployment benefits.)


Selling Shareholders

  • May be able to delay or even eliminate capital gains taxes incurred from selling stock to an ESOP
  • Can exit the company on their timeline. Owners can sell all of their shares at once, or some portion of their shares on the schedule of their choosing.
  • Can remain employed at the company after selling all their shares.
  • Can find a willing, qualified buyer when these may be scarce.
  • Can keep alive the culture and company they founded or developed (rather than having another company tear it down).


Employee Owners

  • Get a retirement plan that typically requires no out-of-pocket contribution from them. (ESOPs can be particularly beneficial for those who cannot afford a payroll deduction to a 401(k) plan.)
  • Share in the rewards when the company performs well.
  • Enjoy greater job stability. Those who work at companies with employee stock ownership are 6.2 times less likely to be laid off than those at conventionally owned companies. (See page 4 of our Media Kit for more details.) 
  • Often have access to two retirement plans; many employees have no access to employer-sponsored retirement plans at all. 
  • Typically receive more company financial information than those in conventionally owned firms. 


Companies

  • May be able to avoid paying federal and even state income tax on the portion of the business owned by the ESOP.
  • May be able to take a tax deduction on dividends paid on ESOP stock.
  • Can use an ESOP for tax beneficial financing, in which no taxes are paid on the principal or interest on the loan.
  • May be more likely to withstand tough economic times.
  • Can enjoy business continuity since employees, who know the business and customers best, remain and provide uninterrupted products and services.
  • Offer a benefit that aligns employees’ interests with the company’s long term financial health.


Additional Resources

White Paper
ESOP Brief 1 Page 1

ESOP Brief #1: What is an ESOP?

A perfect introduction for those considering an ESOP or looking to learn more. While most ESOP Briefs are available only to members, this brief is free to the public. Written by the content experts on The ESOP Association's Advisory Committees, ESOP Briefs help you grasp key ESOP concepts quickly. 

Media Guide

2018 ESOP Association Media Kit cover brand ok
Media Kit

Get key facts and insights on ESOPs, including how they fare regarding: corporate performance, job retention, wealth inequality, employee engagement, and employee training.

With links to the source material, such as academic research on ESOPs and employee ownership.

Survey Report
EPS Report Cover_Page_1

ESOP Association Member Survey

Most ESOPs are privately held, so it can be difficult to get a glimpse of their financial performance. This annual survey of ESOP Association member companies offers longitudinal insights into how well ESOPs perform—in good financial times and in bad.

More Information

Membership Inquiries—Join Us!

Companies that are considering an ESOP, have an ESOP, or provide services to ESOPs are all encouraged to join our engaged, passionate community. The best information you can get is from other ESOPs that are on the same journey. 

For membership information, click below. 

Press Inquiries—Learn More

If you are a reporter working on a story or simply want to learn more about ESOPs, reach out to us and we will be happy to share information and research with you, connect you to our members, and provide interviews. 

To get started, click below.