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What Is an ESOP?

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  • Last Modified Date: 25 September 2014
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An employee stock ownership plan (ESOP) is a way in which employees of a company can own a share of the company they work for. There are different ways in which employees can receive stocks and shares of their company. Employees can receive them as a bonus, buy them directly from the company, or receive them through an ESOP.

In the United States, ESOPs are a very common form of employee ownership. They have been growing in strength since about 1974. Around 11,000 companies have an ESOP in place, and nearly 8 million employees are involved in them.

Companies may establish an ESOP for a number of purposes. Most press attention regarding the use of ESOPs focuses on their use as a takeover defense or as buyouts of failing companies. These account for a very small percentage of ESOPs.

The main purpose of an ESOP is to reward and motivate employees. They are also used to provide a market for departing owners of successful companies. In most cases, an ESOP is given to an employee, rather than purchased by an employee.

An ESOP is similar to a profit-sharing plan. A company sets up a trust fund, into which it contributes either new shares of its own stocks or cash to buy existing shares. Another version of the ESOP borrows money in order to buy existing or new shares. In this case, the company makes cash contributions to the plan in order to repay the loan.

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Company contributions to the plan are tax deductible. Shares in the trust are generally allocated to individual employee accounts. All employees over the age of 21 can participate in the plan, and senior members of the workforce acquire an increasing right to the shares in their account. This is known as vesting, and employees should be fully vested within five to seven years. Other employee’s shares are based on relative pay or some other equitable formula.

When employees leave the company, they receives their share options, and the company must be able to buy back these options. They must buy them back at their full market value. In private companies, employees are able to vote their shares on major issues such as relocation or closure. In public companies, employees can vote on all issues.

There are a few drawbacks to this plan. The cost of setting up an ESOP is around 30,000 US dollars (USD) for even the simplest of plans. When any new shares are issued, the stock of existing employees will become diluted. This dilution will be measured against the motivation and tax benefits of the ESOP. Also, private companies must buy back departing employees' shares, and this can become a major expense.

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Discuss this Article

anon943938
Post 24

I am fully vested in an ESOP and my company has registered for an IPO. How will an IPO affect my ESOP?

anon929576
Post 23

Our esop year runs from April 1 to March 31. I want to quit soon, so when should I have my last day be?

anon336569
Post 22

I have my ESOP from the company that I was fired from after eight years. I was fully vested and they told me I can't have anything until I'm 54 years of age and I'm four months from being 50. I am also about to lose my home and I can't find a job anywhere. I need the money to one live and to send my daughter to college.

beaujojo
Post 21

I'm 80 percent vested with a company that is 100 percent employee owned. If I were to quit now, do I get the full 80 percent after it's repaid? Or do I need to be 100 percent vested to get any money at all?

anon272004
Post 20

I am 60 percent vested in an ESOP. I called wanting to know if I could withdraw my money, and they told me I had to wait until 2018 to take it out. I'm 27 years old with arthritis and am not able to work, so I really could use that money. Is there any way around having to wait that long?

nilesh44121
Post 19

I am a student of MLW (Master Of Labour Welfare) and I am doing my major project on ESOP. So can anyone tell me the current requirement of ESOP?

anon247499
Post 18

My wife was recently laid off. She was 100 percent fully vested in her ESOP. When she left, they told her that she was not allowed to gain access to the money until five years later. I want to move her money into and IRA or something.

Does that sound like a regular part of an ESOP?

anon150265
Post 17

Answers to questions:

16. If you did not reach the stated retirement age and left the Company, you may have to wait for the ESOP loan to be repaid.

15. Sound like they terminated the ESOP. You should receive your money, I would contact a lawyer that specializes in ESOPs.

14. Maybe, you can you may want to have an external advisor examine if an ESOP is feasible for your company

11. Depends, you should be able to get it earlier, but i still would check the summary plan description to see full details.

12. Most likely, Until the either the ESOP loan is repaid. I would check the summary plan description or SPD.

anon145754
Post 16

I worked for a company for 13 years and am 100 percent vested in esop. I left the company in 2007 and they say I have to wait for five years to get my money. Is this true and if so why? Can i take a loan out against it.

anon136124
Post 15

I worked for a company who was sued my managers. Managers won the lawsuit. Company made all managers 100 percent vested. I had to go on permanent disability and now company is saying I can not get me ESOP. They are directly there money. In other words, they are going bankrupt. They used the esop money to stay afloat. Can they do this to me. I should have already had my money.

anon92757
Post 14

I am running my financial company successfully and I am paying salary to all employees via cash. can I issue an ESOP to my employees?

anon82577
Post 13

Best way to ensure a successful ESOP is to use a good advisor. Our company used Corplan advisors.

anon51007
Post 12

I got laid off from my job in 2007. how long will it be until i get my money from my esop? I was with the company for seven years so i am vested.

anon43461
Post 11

Do I have to retire from my company in order to get the entire amount of my esop for 2008? How long do I have to wait to get it if I don't?

anon39699
Post 10

I lost my job in March of 2008, I have 3 years and 7 more monthes before I will start receiving payouts from my ESOP. My shares are worth over 6 figures. Is there anyway to get some kind of a loan against that money. I have already lost my home and am about to lose my car. Want to work, but no jobs around here. Thanks.

anon37898
Post 9

My former employer filed for Chapter 11 Reconstruction and also prior to the filing petitioned for a dissolution of the ESOP. Will I see any of the monies from my 14 years of service with the company? Thanks. --

anon35905
Post 7

I left my money in ESOP June 2008. when will I get my investment

esoptodd
Post 6

The firm I work for set up an ESOP in 2004 and has been contributing cash annually. The ESOP to this date is only holding cash (no company stock). Do they have to purchase company stock or can they continue to hold the cash until a point in time when they are ready to purchase the stock? The cash is earning from 1 to 3% and i'm sure the value of the company has increased much more than this on an annual basis.

anon17045
Post 5

Hi. I would like to know how to determine the fair value of a unlisted company for ESOP?

paintlady
Post 4

I left a company that had an ESOP in March of last year. I left my money in it even after I left the company and I have not received a statement of my account since May of 2007. When do they legally have to get me my statement? I am currently trying to get my monies out of the program and am being told that I need to wait for my statement. In the past the statements have been to us by mid May, here it is mid-June and I haven't received anything and I 've been told for the last two weeks that it's on its way. Thank-you!

katmando099
Post 3

I'm the one that posted the question regarding the rights of employees in an ESOP program? Is there anything that can be done as employees?

anon6070
Post 2

I'm interested in what level of rights employees in an ESOP program have? In the last two years, the value of a share has decreased from $470.50 at the end of 2004 to $180.00 at the end of 2006. Do the employees ("owners") have a right to call for accountability of this loss?

homeless
Post 1

Hello,

I work for a financial intitution but will soon be jobless and homeless due to a merger. Will I lose my ESOP and 401K?

Thanks,

H.

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