Case study: benefiting from unique attributes of ESOPs.

• Author: Ellentuck, Albert B.
• Position: Employee stock ownership plans

AN EMPLOYEE STOCK OWNERSHIP PLAN (ESOP) is a stock bonus plan or a combination of a stock bonus plan and money purchase pension plan. This type of plan is designed to invest primarily in stock of the employer. Contributed cash is used to purchase the corporation's stock or retire debt incurred to acquire the corporation's stock. Assuming all the technical requirments are met, the corporation's contributions to the ESOP are tax deductible. The general qualified retirement plan rules regarding minimum participation, nondiscrimination, and vesting apply equally to ESOPs.

[ILLUSTRATION OMITTED]

-Stock acquired by the ESOP is allocated to participants' accounts, typically on the basis of their compensation. Participants usually have two accounts in an ESOP: (1) a company stock account to which is credited the number of shares of the company's stock that have been acquired by the ESOP and allocated to the participants, and (2) an other investments account to which is credited the monetary value of all assets other than the company's stock that have been acquired by the ESOP and allocated to the participants, including the trust income or loss.

Since the ESOP is a qualified retirement plan, the amount allocated to the participants' account is not included in the participants' gross income in the year it is contributed. Instead, it accumulates tax deferred until a participant retires, dies, becomes disabled, or otherwise terminates employment. Then, depending on the distribution policy established by the administrative committee and subject to the statutory requirements, the stock is either distributed to the participant or converted to cash, and the proceeds distributed to the participant.

There are some misconceptions about ESOPs. The phrase "employee stock ownership plan" implies that the employees buy the company's stock. In reality, the employer contributes stock or cash that is used by the ESOP to purchase stock. These amounts are held by the ESOP for the employees' benefit. The employer-provided funds do not come from employees' wages. This has led some employers to feel that some of the stricter ERISA rules should not apply to them since the stock is free to the employees. However, all of the ERISA qualification, fiduciary responsibility, and other rules apply to ESOPs.

Some people will be concerned that an ESOP gives employees voting control of the company. This has not been the case. Under most ESOPs, the ESOP trustee votes the shares as directed by an administrative committee appointed by the company's board of directors. Although the voting of the...