Employee retention is vital to growing a business and maintaining operations. A nonstop churn of new hires can be disruptive to business processes and costly. There is no one-size-fits-all solution to keeping employees happy, but an increasingly popular benefit implemented by companies to positively impact retention and recruiting efforts is an Employee Stock Ownership Plan (ESOP).
Differing from stock options — which allow employees to use after-tax wages to purchase discounted company stock shares — ESOPs qualify as retirement plans that provide employees ownership interest in the company through shares granted at no direct cost to the employee.
According to the National Center for Employee Ownership
, as of 2024, there were an estimated 6,500 ESOPs in the U.S., covering 14.7 million participants and holding over $2.1 trillion in assets. And although those millions of employees can receive significant benefits through distributions and tax incentives, employers — be they a smaller entity or a large corporation — find several advantages to these plans, as well. Here are a few:
ESOPs are organized as a trust that companies sell their existing or newly created stock shares to, financing them through specialized loans or purchasing them with cash. A trustee (either a person or committee) administers the plan, and employees who participate in the ESOP are given a specific number of shares and may be eligible for more the longer they are with the company.
Typically, it is only at the end of employment that shares are sold back to the ESOP and employees are compensated for them (ESOPs are the legal owner of the shares, so employees cannot sell at will). Distributions are subject to income tax, but there may be an excise tax for those who receive their distribution upon leaving the company early or termination. Some plans distribute regular dividends to employees, as well. Distributions can be rolled over into an IRA or another tax-qualified retirement plan to further defer taxes.
Before establishing an ESOP, interested companies should conduct a feasibility study to ensure the business can sustain one and that there is sufficient interest from employees who would be participating in the plan. If so, an attorney with experience in ESOPs can draft the documents in concert with company leaders, outlining the plan’s structure and guidelines. Next is connecting with a commercial lender familiar with financing ESOPs and identifying a trustee(s).
Once up and running, an ESOP may foster an extra sense of pride and commitment that provides an advantage in the market, eases any retention concerns and unlocks a new level of success.
For more information on starting an ESOP and retirement plans, consider a chat with the experts at F.N.B. Wealth Management.
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