Tuesday, November 30, 2010

Does Your Company Have an ESOP? Should It?

Does your company sponsor an ESOP (employee stock ownership plan)? Should it? According to research by the National Center for Employee Ownership (NCEO), closely-held companies that sponsor ESOPs are more successful (higher sales and profits) than those that do not. Is this a causal effect? Or, on the contrary, are more successful companies simply more able to sponsor an ESOP?

In any event, here are a few tidbits about ESOPs:

  • They are qualified defined contribution retirement plans and are subject to all of the attendant rules plus a few that relate only to ESOPs
  • ESOPs can be leveraged; i.e., they can be financed partially through loans
  • Over-leveraging an ESOP can be disastrous. Companies that may have a decreasing population need to be careful to not borrow too much. ESOP lenders will almost always try to get the plan sponsor to borrow as much as possible.
  • ESOPs can be a great tool for succession planning or estate planning (see, for example, Section 1042 exchanges).
  • Nondiscrimination testing for ESOPs can be far more restrictive than for other qualified retirement plans.
  • Private companies that sponsor ESOPs will have a relatively continual repurchase liability (to buy back shares from terminating/retiring employees). It is important that they have a good handle on this liability and associated cash flow requirement.
So, should you have an ESOP? I don't know. It takes careful analysis, and that analysis is different for each company.

1 comment:

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