Overview: An employee stock ownership plan (ESOP) is a defined contribution plan that can be offered by employers as part of their employee benefit program that makes employees owners of the company for which they work. Since ESOPs give employees a vested interest in the company for which they work, they can serve as an incentive to improve efficiency and productivity, which, in turn, may have a positive impact on the employer's bottom line.
Employers typically allocate shares of stock to the individual accounts of plan participants on an annual basis. Allocation may be based on salary, years of service or both. An ESOP is a defined contribution plan and subject to the minimum standards for eligibility and vesting under ERISA.
The advantages of ESOPs include allowing employers to: (i) make tax-deductible contributions, either in the form of cash or stock; (ii) borrow to make contributions; and (iii) have both the contribution and the interest due be tax deductible.
Additionally, employers do not owe income tax on the company profits held in this type of plan, up to a 30 percent limit, and in some corporate structures, they can distribute reasonable dividends on a tax-deductible basis. These advantages mean that employers may be able to free up cash flows to be used to meet other business needs.
Trends: ESOPs continue to be recognized as a useful tool to reward and motivate employees. Participation is on the rise, as employers realize related benefits associated with recruitment, retention, productivity and efficiency.
Author: Tracy Morley, SPHR, Legal Editor
As mandated by the Internal Revenue Service, every employer that is organized as a corporation that transfers stock to any person upon the exercise of an incentive stock option must file Form 3921, Exercise of an Incentive Stock Option Under Section 422(b), on an annual basis.
As mandated by the Internal Revenue Service, every employer that is organized as a corporation, and that records or has its agent record the first transfer of legal title to shares of stock acquired by employees upon the exercise of options granted under an employee stock purchase plan must file Form 3922, Transfer of Stock Acquired Through An Employee Stock Purchase Plan Under Section 423(c), on an annual basis.
Attracting, motivating and retaining talent is critical to an employer's short- and long- term success. This section assists HR professionals in implementing a comprehensive, integrated total rewards strategy that can help achieve those important objectives.
Employment glossary definition of ESOP (Employee Stock Ownership Plan).
Employment glossary definition of Incentive Stock Option (ISO).
Employment glossary definition of NSO (Nonstatutory Option).
Employment glossary definition of Stock Option.
Employment glossary definition of ESPP.
HR guidance on the value of Employee Stock Ownership Plans.