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What Is an Example of an ESOP? Consider an employee who has worked at a large tech firm for five years. Under the company's ESOP, they have the right to receive 20 shares after the first year, and 100 shares total after five years. When the employee retires, they will receive the share value in cash.
In an ESOP, a company sets up an employee benefit trust, which it funds by contributing cash to buy company stock, contributing shares directly, or having the trust borrow money to buy stock.
An employee stock ownership plan (ESOP) is an IRC section 401(a) qualified defined contribution plan that is a stock bonus plan or a stock bonus/money purchase plan.
After the employee terminates, the company can make the distribution in shares, cash, or some of both. Cash is paid to the employee directly. Often, company shares are immediately repurchased by the ESOP, and the employee receives cash equivalent to fair market value as determined by the most recent annual valuation.
They also help staff to feel more appreciated and better compensated for the work they do. Companies typically tie distributions from the plan to vesting, which gives employees rights to employer-provided assets over time. It's important to read the terms of your ESOP, as each one may vary and have different rules.
Unlike most retirement plans, ESOPs: Are required by law to invest primarily in the shares of stock of the sponsoring employer. Are trusts that hold shares of the business for employees, making them beneficial owners of the company that employs them.
ESOPs are expensive to set up, and expensive to maintain as an appraisal is required annually to stay in compliance. If the cash flow dedicated to the ESOP will greatly limit the cash available to reinvest in the business over the long-term, an ESOP is unlikely to be a good fit.
An ESOP is an employee benefit plan that enables employees to own part or all of the company they work for. at fair market value (unless there's a public market for the shares). So, the employee receives the value of his or her shares from the trust, usually in the form of cash.