What is an ESOP?

An ESOP (Employee Stock Ownership Plan) is a type of tax-qualified retirement plan. As such, contributions made on employees' behalf under the Plan are tax deferred, for Federal and state corporate income purposes, while the employer receives a current income tax deduction for contributions made to the tax-exempt Trust. This enables the Company to make deductible cash and/or Company stock contributions to the Trust, which are used to acquire stock of the Company on behalf of its employees. The advantage of the ESOP is that employees are able to acquire this stock without paying a current income tax on the stock. Again, this results from the fact that the contribution is made by the Company under a tax-qualified plan, meaning that the stock is not taxed to employees personally as it is allocated. The advantage to the Company is that the ESOP makes pre-tax dollars available to create a market for closely held stock while providing an employee benefit at the same time.

History
The term "Employee Stock Ownership Plan" was first defined by Federal legislation in the Employee Retirement Income Security Act of 1974. Thus, in a sense, the ESOP is a relatively new form of plan which has existed only since September 2, 1974 when ERISA was enacted into law. In the Revenue Act of 1978, ESOPs are defined in the enabling legislation as "...a technique of corporate finance that utilizes the advantages of a tax-exempt employee benefit trust to encourage the financing of corporate transactions". These transactions can be effected through the ESOP in a manner which results not only in the company's achieving its goals but also in its employees ultimately earning an additional ownership stake in the employer in the process. From 1974 through 1989, it has been estimated that 12,000 companies have installed Employee Stock Ownership Plans. This brings the total number of employees covered by ESOPs to more than 11,000,000. However, many ESOPs existed prior to 1974, even though such plans were not defined by Federal statute. Employee Stock Ownership Plans were first recognized by the IRS in 1974.

Although technically only in existence since 1952, the concept of Employee Stock Ownership Plans has been in the law since 1921 in the form of Stock Bonus Plans. Tax-qualified Stock Bonus Plans, like Employee Stock Ownership Plans, acquire company stock in tax-exempt trusts which are designed to enable employees to own part or all of the company for which they work, without investing their own funds. The distinguishing feature of an ESOP is that an ESOP, unlike a Stock Bonus Plan, may engage in "leveraged" purchases of company stock. That is, an ESOP may acquire stock not only on a year-by-year basis, but also may borrow funds in order to purchase a block of stock.

Disclaimer

Securities offered through M Holdings Securities, Inc., a registered broker dealer, member FINRA / SIPC. Executive Financial Services is owned and operated independently from M Holdings Securities, Inc. Executive Financial Services is a member of M Financial Group. Please go to mfin.com/DisclosureStatement.htm for further details regarding this relationship.