The number of employee stock ownership plans is growing across the country. The National Center for Employee Ownership (NCEO) reports that in 2014 19.5% of employees in the private sector reported owning company stock, up from 17.4% in 2010. So what is it and is it really beneficial to your company?
What is an Employee Stock Ownership Plan?
With an employee stock ownership plan (ESOP), owners can sell all or a part of their stock to an ESOP. An ESOP is a qualified retirement plan option that allows eligible employees (usually, employees who have been with the company for a certain period of time) to receive an allocation of stock annually. This allows the owner of the business to either leave all at once, if they choose, or they can retain control of operations and slowly transition out of the company.
Generally, the financing for the ESOP to purchase stock comes from a bank. The company will then make contributions to repay the loan over time, and as the loan gets repaid, shares are released and allocated to those who are a part of the ESOP.
What Are the Benefits of an ESOP?
There are a number of benefits to employers and employees, especially when it comes to an owner transitioning out of a company. Some of the benefits include:
Tax Benefits and Savings: The ESOP is basically funded with pre-tax dollars and principal payments, unlike other debt repayment plans, are tax deductible. Business owners also have the option of tax-deferral provisions by purchasing replacement property. Additional tax savings can be realized by utilizing trusts, either a charitable remainder trust or a family limited partnership along with additional trusts. These tax savings can then contribute to an improved cash flow for your business, which is another benefit of an ESOP.
Benefits for the Employees: Employees also receive a tax benefit from ESOPs because their retirement accounts will accrue tax-free, unlike some other retirement plans. Also, according to the NCEO, ESOPs tend to accrue a higher balance and have a higher rate of return than most other retirement plans , which will help increase employee interest in the growth of the company and align their interests with that of the company’s. By creating this common goal for the company’s growth, owners are creating the possibility of better work performance, retention and overall better team morale.
Benefits for the Owner : As mentioned above, owners have the option of leaving the company all at once after selling their shares to an ESOP or to transition out slowly. Hence, an ESOP gives the owner of the company the flexibility of time, allowing them to properly plan their exit without feeling rushed to give up management of their company.
Is An ESOP Right for My Business?
Every company is different, so an ESOP may not be right for your company because there are some drawbacks in certain situations. But there could also be additional benefits that could be utilized, depending on your business and how the ESOP is structured.
To find out if an ESOP is a beneficial option for you, contact BSSF today!
ABOUT THE AUTHOR
Timothy D. Grunstra, CPA
Tim is a Principal and Shareholder with Brown Schultz Sheridan & Fritz. As an accountant specializing in a variety of niche markets, including manufacturing, healthcare, and nonprofits, his client base is primarily in the Central PA region of Harrisburg, Lancaster, and York. He provides accounting and auditing services in addition to Yellow Book and A-133 Audits. Tim serves as a trusted advisor to his clients, many of whom he has worked with throughout his 20+ year career at the Firm.