What is an ESOP Plan and How Does it Work?

An ESOP Plan is an employee stock ownership plan. It is a special type of defined contribution plan where the assets of the plan are invested primarily in employer securities.

What are the advantages of an ESOP Plan?

An ESOP plan can have several advantages;

• It can provide retirement benefits to employees
• It can be used to increase the company’s cash flow
• It can be used to finance the company’s growth
• It can help the owner of a closely held company in succession planning

What are some unique characteristics of an ESOP plan?

Contributions to an ESOP are tax deductible (25% of total compensation).

The assets in an ESOP are funded primarily in employer securities.

Employer securities can be readily tradable common stock on an established market, or employer issued common stock.

Employer securities in an ESOP may be purchased from existing shareholders or new stock may be issued.

ESOP plans have the ability to borrow money.

An ESOP plan that secures a loan to purchase employer securities is called a leveraged ESOP; an ESOP without a loan is called a non-leveraged ESOP.

What considerations should be taken before establishing an ESOP plan ?

Employee stock ownership plans are complicated arrangements that involve multiple disciplines, so receiving good advice is paramount. There should be a meeting where at least all of the following individuals are present; accountant, ERISA counsel, actuary and/or pension consultant, and investment consultant.

Owners should carefully consider what the true value of what their company is worth, since this will determine how much cash is raised for the ESOP plan.

Many employers are surprised in first phase in establishing an ESOP with the business valuation. They find the cost of valuation itself to be too high, or the determined value of their company to be too low.

In addition, the owner should consult with their CPA to determine if cash flow are adequate to provide contributions to the ESOP plan and repay a loan in a leveraged arrangement.

How can Trinity Pension Consultants help?

If you are considering establishing an ESOP plan, Trinity Pension Consultants can help:

• Provide an overview and background of how ESOP Plans are established and operated
• Evaluate your corporate structure, benefit programs, and ownership goals in order to provide a recommendation for the suitability of an ESOP Plan.
• Facilitate the conversation between the plan sponsor, CPA, ERISA attorney, and investment consultant
• Coordinate the establishment of the plan documents and IRS Determination Letter

If you currently sponsor an ESOP Plan, Trinity Pension Consultants can help provide:

• Valuation of the assets
• Participant benefit statements
• Allocation of released shares
• Allocation of gain/loss to participant shares
• Annual Return Form 5500

We can also answer your questions about ESOP rollovers and other ESOP provision questions.

For more information on how Trinity Pension Consultants can help you with an ESOP Plan, call Anthony Warren at 330-869-3747.