The key advantages of establishing an Employee Share Ownership Plan (ESOP) are:
Benefits of ESOP
Tax deductible benefits- the owner of the stock can sell some or even all the shares to the employees free. Increase flexibility of the proprietor- The owner can gradually withdraw or even at once withdraw from the organization. You can sell all your shares to an ESOP and remain part of the company.
An ESOP is a kind of employee benefit plan, similar in some ways to a profit-sharing plan. In an ESOP, a company sets up a trust fund, into which it contributes new shares of its own stock or cash to buy existing shares. ... Shares in the trust are allocated to individual employee accounts.
It is difficult to give a hard-and-fast rule as to how much company stock you should own in your 401k. Some experts say it should be no more than 10-15%.
Disadvantages of ESOP Plans
Most ESOPs are leveraged, using some borrowed money to finance the exit transaction for the selling shareholder. Highly cyclical companies prone to volatility are poor candidates for deeply leveraged transactions and can be harmed by lender demands in a downturn.
Terminated employees are only allowed to take their vested portion of plan benefits. These benefits can be moved into another retirement plan, withdrawn into a regular account or distributed in equal payments over the life of the employee. Each option has different tax and penalty consequences.
Research by the Department of Labor shows that ESOPs not only have higher rates of return than 401(k) plans and are also less volatile. ESOPs lay people off less often than non-ESOP companies. ESOPs cover more employees, especially younger and lower income employees, than 401(k) plans.
Advantages: 1) the fair market value of contributions of employer stock are tax deductible to the employer, which can result in < income tax for the corp. 3) promote productivity within the corp because participants, as shareholders, have a vested financial interest in the growth & success of the corp.
To avoid paying taxes and potential penalties consider a rollover for your ESOP distribution. The rollover process takes place when tax-deferred funds from your ESOP are transferred to another tax deferred account such as an IRA or 401(k).
ESOP – or Employee Stock Option Plan allows an employee to own equity shares of the employer company over a certain period of time. The terms are agreed upon between the employer and employee. Grant Date –The date of agreement between the employer and employee to give an option to own shares (at a later date).
The IRS allows a person to take a loan from his ESOP account for any reason, although an employer retains the right to permit a loan only for specific purposes, such as to pay for college expenses or the purchase of a home, as long as the restrictions apply to all of the ESOP's participants.
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