What is employee ownership?
Employee ownership is a broad term for any arrangement under which employees own, directly or indirectly, shares in their company or the right to the value of shares in their company. See The World of Employee Ownership.
What is an ESOP? What does "ESOP" stand for?
An ESOP (employee stock ownership plan) in the U.S. is an employee benefit plan that buys and holds company stock in accounts for the benefit of participants. When used outside the U.S., the term "ESOP" means different things, such as stock options in India. See The World of Employee Ownership.
How many ESOPs are there in the U.S.?
There are roughly 6,500 ESOPs in the U.S., but some companies have multiple plans, so there are a little over 6,300 companies with an ESOP. See our Employee Ownership by the Numbers article and A Statistical Snapshot of ESOPs infographic.
How many ESOP participants are there in the U.S.?
There are 14.7 million ESOP participants; 10.7 million are "active" participants (still working for the employer) and the rest are "inactive" (they no longer work for the company sponsoring the ESOP and are still receiving benefits, so they are still in the plan). See our Employee Ownership by the Numbers article and A Statistical Snapshot of ESOPs infographic.
How does an ESOP work?
The company sets up the ESOP plan and trust and contributes tax-deductible cash to buy company stock and/or company stock to the plan. Companies can also borrow money to buy a large block of shares and then repay the loan through the ESOP trust. The ESOP trust is the legal owner of the shares (to be precise, the trustee is the shareholder of record), and employees have accounts in ESOP. Employees usually pay nothing themselves and vest over time, receiving the value of their accounts after leaving the company. ESOPs are the only way a company can redeem shares in pretax dollars. See our infographic How an ESOP Works at esopinfo.org and our Interactive Introduction to ESOPs.
What are ESOPs used for?
The classic use of an ESOP is to buy out all or part of the stock of one or more owners of a private company (one that isn't publicly traded); most ESOPs are in private companies. ESOPs are also used for purposes such as acquiring capital by borrowing through the ESOP, aligning employee and company interests, and enlarging the market for thinly traded shares in banks. ESOP companies also use ESOPs to buy other companies. See our Interactive Introduction to ESOPs.
What are the ESOP tax incentives for selling business owners?
Under Internal Revenue Code Section 1042, business owners in private C corporations who sell to an ESOP owning 30% or more of the company after the sale can defer taxation on the sale proceeds indefinitely by reinvesting in securities of U.S. operating companies within 12 months.
What are the ESOP tax incentives for the sponsoring company?
Company contributions of stock or cash to the ESOP are tax-deductible. (If the company contributes new or treasury shares, the tax deduction enhances cash flow at the cost of some dilution.) In S corporations (where corporate taxation is passed through to owners), the ESOP (the legal owner of the shares it holds) is not taxed at the federal and usually the state level, meaning that a 100% ESOP-owned S corporation saves a large amount of money by not having to fund the tax bills of its shareholders, which it would otherwise usually do. Dividends passed through to employees, used to repay an ESOP loan, or reinvested by employees in company stock are tax-deductible.
What are the ESOP tax incentives for employees?
Employees pay no tax until they receive distributions from the ESOP and even then can roll the distribution over to an IRA (or sometimes a retirement plan at a subsequent employer) to delay taxes.
What is an ESOP company?
It is simply a company with an ESOP. You may see companies with ESOPs casually referred to as "ESOPs" themselves, but that has no actual meaning. Having an ESOP means adopting an employee benefit plan that holds company stock, not changing the corporate form.
What kind of company can have an ESOP?
A company (either private or public) with stock, usually meaning a C corporation or S corporation. Additionally, the IRS ruled that an LLC taxed as a corporation could have an ESOP because that LLC's unit shares met the definition of "eligible securities" for an ESOP. Professional corporations can have ESOPs to the extent the governing law allows a non-professional in the field (here, the ESOP trust) to own the company's stock.
What is a sustainable ESOP?
This means keeping the ESOP going for the long term instead of terminating the plan at some point (for example, because the company did not plan for its obligation to buy back stock from departing participants and is now financially overwhelmed). See our article on ESOP sustainability.
Are ESOPs the same as stock options?
No, they are completely different, as explained in The World of Employee Ownership. An ESOP is a tax-favored retirement plan that holds stock in accounts for the benefit of employees (who themselves are not the literal owners of the shares), must include most full-time adult employees with a year of service, and mostly pays out after employees leave the company. A stock option is the right to individually buy stock at a given price and can be granted to as few people as desired (and if a nonqualified option, may be granted to nonemployees). But note! Outside the U.S., "ESOP" means something else; in India and sometimes elsewhere, it can or does refer to stock options.
What are some well-known and/or large ESOP companies?
See the Employee Ownership 100, which features companies like Publix Super Markets, W.L. Gore, and Davey Tree. Note: these are not just large companies with ESOPs (you might have a gigantic public company with an ESOP that only owned 1% of the stock); rather, these are actual employee-owned companies where at least 50% of the stock is owned by an ESOP or other broad-based employee ownership plan.
How do I find ESOP companies near me?
See our ESOP map of the U.S., or for precise data, our ESOP company lists.
Which states have the most ESOPs?
Generally speaking, more populous states and the Great Lakes region. See our interactive ESOP heatmap.
How do ESOP companies perform?
ESOP companies grow faster and lay people off at dramatically lower rates than comparable companies. See Key Studies on Employee Ownership and Corporate Performance.
Is an ESOP good for employees? How do ESOP participants fare compared to their peers?
Multiple studies over the years have found that ESOP participants are better off than comparable workers. A 2017 NCEO study found that ESOP participants had 33% higher median income, a 92% higher median household net wealth, and 53% more job stability. In a 2021 study, the NCEO found that controlling for size, industry, and location simultaneously, employees in the most common form of ESOPs have about twice the assets in their ESOP accounts as comparable employees have in their 401(k) accounts in similar companies that have retirement plans. The average employer contribution to the S corporation ESOP was more than 2.5 times that of companies offering only a 401(k), and 94% of total contributions to ESOPs came from the employer, compared to 31% for 401(k) plans. ESOP companies usually offer a 401(k) on top of the ESOP as well.
Are ESOPs associated with greater job security?
A 2017 NCEO study compared employee-owners aged 28 to 34 to their peers without employee ownership and found that being in an ESOP was associated with, among other positive outcomes, 53% longer median job tenure. A 2022 NCEO study of food industry ESOPs during the COVID-19 pandemic found that, among other positive outcomes, the ESOP participants had lower median involuntary separation rates (2%, vs. 5% for non-ESOP companies).
How much money are employees getting from ESOPs?
The NCEO analyzed U.S. Department of Labor data and found that in 2020 (the most recent data available at that time), ESOPs paid out more than $149 billion dollars to participants, and total contributions to ESOP accounts were more than $94 billion, averaging $6,758 in contributions per participant.
When do employees get paid out in an ESOP?
Almost solely after leaving the company, and they may come in the form of stock or cash, and all at once (a lump sum) or installments. The particular method and timing depend on how the plan was set up and the employee's particular situation (e.g., whether they are leaving at retirement). The rules are too complex to lay out here; they are explained in When Will I Be Paid? The ESOP Participant's Guide to ESOP Distribution Rules.
Are ESOPs for employees only?
Yes, except that ex-employees who have not been paid out completely remain participants in the plan.
How are ESOP distributions (payouts from the ESOP) taxed?
Participants are taxed only when they receive distributions and are subject to typical rules for tax-qualified retirement plans. If you're younger than 59 1/2 (or 55 if terminating employment), you'll pay income tax plus a 10% excise tax unless (1) you roll over to an IRA (if it's a Roth IRA, you'll pay income tax but not the excise tax) or (2) employment ended due to death or disability. If the ESOP pays dividends to participants at any age, they are taxed as ordinary income, with no excise tax. Distributions are generally taxed as ordinary income, but if you receive company stock in a lump-sum distribution of your entire account after terminating employment or reaching age 59 1/2 and don't roll it over to an IRA or another plan, the net unrealized appreciation (NUA) rules apply: unless you elect otherwise, you'll owe ordinary income tax now on what the ESOP paid for the stock, and later when you sell the shares you'll pay capital gains tax on the NUA—the difference between what the ESOP paid and what the value is at sale. If you roll over to an IRA or employee benefit plan, you will avoid tax now and pay ordinary income tax later on when the money is withdrawn. See ESOP Vesting, Distribution, and Diversification Rules.
Is participant consent required for ESOP distributions?
This is not ordinarily an issue, but participant consent is required for distributions over $5,000 ($7,000 starting in 2024) unless the participant has reached the plan's normal retirement age (or age 62 if that age is earlier than 62).
What happens to the ESOP if the company is sold?
Often the ESOP is terminated, and the participants receive the value of the shares and any other assets in their accounts (this may take some time). In some cases, the ESOP's assets are cashed out and then rolled into a plan in the acquiring company. If the acquirer is an ESOP company, the participants can once again be in an ESOP, now in the new company.
Why can't I sell my ESOP shares any time I want?
The legal owner of the shares in the ESOP is the ESOP trust, not the individual participants. Thus, you can receive your shares (or be paid their cash value) only when you receive a distribution from the plan. And the distribution rules are set up so not everyone needs to receive distributions at the same time; instead, you will receive distributions after you leave the company, and they may be made in installments. Why? The ESOP is a type of retirement plan and is not meant to be a short-term bonus. And in a private company (most ESOP companies are private, not publicly traded), if anyone could demand that the company buy back their stock at any time, a sudden rush of such buybacks could make the company insolvent—and no company would want to adopt an ESOP.
Do I lose my ESOP account if I quit?
Not per se. This revolves around the concept of vesting, which is central to all kinds of benefit plans and incentives. The IRS has a concise explainer of vesting in retirement plans (like an ESOP). If you are not 100% vested in employer contributions to your account when you quit, you will only lose (forfeit) the percentage you have not vested in. So if you are 50% vested, you will lose 50%. Note: participants must become 100% vested upon reaching retirement age or if the plan is terminated. Also, you are always 100% vested in contributions you make to retirement plans like an ESOP, but an ESOP typically uses only employer contributions, so discussions like this often assume the account solely consists of employer, not employee contributions.
Who can I contact about getting my ESOP distribution?
Each ESOP situation is different, depending on your plan's rules and your particular situation (for example, did you quit? or retire? how much were you vested?). Contact your company's HR department. They will know the details of your plan and what your situation is. Additionally, the U.S. Department of Labor (DOL), which along with the IRS enforces the laws governing ESOPs via the DOL Employee Benefits Security Administration (EBSA), has benefit advisors providing individual assistance to participants and beneficiaries in benefit plans such as ESOPs. Participants receive information on their rights and responsibilities under the law and help in obtaining benefits to which they are entitled. Contact a DOL benefits advisor by calling toll-free at 1-866-444-3272 or contact them online at the Ask EBSA page.
When is ESOP Month? (Employee Ownership Month?)
Employee Ownership (or ESOP) Month, which grew out of Employee Ownership Week decades ago, is celebrated in October.
What are other ways of collective employee ownership apart from ESOPs?
There are profit sharing and stock bonus retirement plans that hold substantial amounts of company stock, employee ownership trusts that don't distribute shares or their value but instead pay dividends, and worker coops. Equity compensation plans provide stock or its value, but essentially as a selective reward to be cashed in, not collective ownership. See The World of Employee Ownership.
