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WHY OUTSOURCE YOUR ESOP MANAGEMENT?
ESOPs are found in publicly traded and closely held companies of every size, across every industry of the economy — in fact, ESOPs are particularly common in the AEC industry. It is no surprise why this retirement plan has gained popularity among business owners, management, and employees. For shareholders, ESOPs are a valuable liquidity mechanism that minimizes business disruptions. For employees and management, ESOP participation is a reward for years of dedication and hard work and an incentive for future business growth.
Further, the benefits of ESOP ownership can be accomplished on a tax-advantaged basis. An employee stock ownership plan gives workers ownership interest in the company. ESOP is usually formed to allow employees the opportunity to buy stock in a closely held company to facilitate succession planning.
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Companies can use ESOPs for a variety of purposes. Contrary to the impression one can get from media accounts, ESOPs are almost never used to save troubled companies—only at most a handful of such plans are set up each year. Instead, ESOPs are most commonly used to provide a market for the shares of departing owners of successful closely held companies, to motivate and reward employees, or to take advantage of incentives to borrow money for acquiring new assets in pretax dollars.
In almost every case, ESOPs are a contribution to the employee, not an employee purchase. One of the advantages is it fosters ownership mentality, which means it encourages employees to take ownership of the company's success. It also is linked to positive employee outcomes. This is actually backed by research that shows employees are less likely to be laid off or experience employee turnover at companies with employee stock ownership plans.
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The most obvious advantage is the tax benefits it brings since employees are not taxed on their shares until they sell. The benefits of an ESOP can be significant for selling shareholders, the management team, and the employees. However, the federal regulations governing ESOPs are complex and the cost of establishing and maintaining a plan may be greater than other types of retirement plans. As such, it is critical to consult with advisors who are knowledgeable about the legal, accounting, and administrative issues unique to ESOPs. Establishing and administering an ESOP can be complicated.
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ESOPs encourage employees to do what's best for shareholders since the employees themselves are shareholders and provide companies with tax benefits, thus incentivizing owners to offer them to employees. Companies typically tie distributions from the plan to vesting.
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.
Alternatively, the ESOP can borrow money to buy new or existing shares, with the company making cash contributions to the plan to enable it to repay the loan. Regardless of how the plan acquires stock, company contributions to the trust are tax-deductible, within certain limits.