Employee Stock Ownership Program (ESOP)
Employee benefit program that also serves as a tax efficient ownership succession tool.
What is an ESOP?
An ESOP is a type of qualified retirement plan, similar to a 401(k) plan, that invests primarily in private company stock and holds its assets in the plan's trust for employees. ESOP participants (employees) accrue shares in the plan over time and are paid out by having their shares bought back, typically when they leave the company or retire. By offering employees a vested interest in the company, you may be able to enhance productivity, claim tax advantages, facilitate succession planning, and more.
Huntington can provide an efficient process for forming an ESOP, financing the transaction, and investing proceeds in a tax-efficient manner. To establish an ESOP, a company adopts an ESOP plan and creates a trust for its employees. In a leveraged ESOP, the ESOP borrows money to buy company shares. Each year, the company makes tax-deductible contributions of cash or stock, which are used to allocate shares to participant accounts under the ESOP. The company buys back shares and distributes cash to participants under the terms of the plan, generally upon departure from the company or retirement.
Benefits of an ESOP
An ESOP can provide benefits for a company, its employees and selling shareholders. Ideal for profitable, privately-held companies, it can offer tax advantages, improved liquidity, and more.
For the Company
An ESOP enables businesses to leverage tax-advantaged financing. Further, an S-Corp that is 100% owned by an ESOP typically will not have corporate tax or shareholder tax distributions to pay. This benefit plan often positively impacts the business’s workforce, motivating teams and increasing retention by giving employees a stake in the company.
For Employees
An ESOP is part of a larger remuneration package, giving employees an additional way to save for retirement. Employees are not taxed on employer contributions and may be eligible to reduce or defer income tax consequences at the time of distribution, depending on rollovers and other strategies they discuss with their financial advisors.
For the Seller
Shareholder sellers may get more money over time after tax for the sale of closely held stock than if they were to sell the assets to a third party. The seller and previous management frequently maintain management responsibilities for the company. Sellers also may have opportunities to defer or reduce capital gain taxes from the sale.
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