Frequently Asked Questions

An Employee Stock Ownership Plan (ESOP) is an employee benefits program that empowers employees to own a piece of the company they are helping to build. In an ESOP, employees acquire company stock as part of their retirement package, which is often tied to vesting and rewards longevity with the organization. Companies that utilize ESOPs are often more productive and enjoy a positive, collective internal culture. ESOPs are also a great recruiting and retention tool. 

An ESOP Trustee is an objective third party that has fiduciary responsibilities for the Employee Stock Ownership Plan. A Transaction Trustee is appointed when an ESOP is formed, sold, or terminated. In this instance, the trustee’s role is to manage the transaction on behalf of the employees, ensuring share prices are fair market value and that the deal is structured in the best interest of participants. An Ongoing Trustee acts as the plan's fiduciary. It has legal ownership of the company stock and must always act in the best interests of the plan participants and beneficiaries. The ongoing trustee’s job is to protect participants and improve the ESOP.

Employees who participate in a company’s ESOP receive an allocation of shares. When an ESOP is first formed, a trust fund is set up. The fund is comprised of newly issued shares and/or cash to purchase existing shares which, once purchased, go back into the trust. Shares of company stock are allocated to each participant’s individual ESOP retirement plan account every year. Read more on this topic in our comprehensive blog.

An employee's ability to sell shares in an active ESOP depends on the specific plan's rules and structure, as well as the conditions set forth in the company's ESOP agreement.
‍

In general, ESOPs are designed to be retirement plans, and they usually do not allow employees to sell shares while they are still employed by the company. Instead, employees accumulate shares in their ESOP accounts over time through company contributions, which are often subject to a vesting schedule. The shares represent a future benefit to the employees when they leave the company or retire.

When an employee leaves the company, retires, or in some cases, becomes disabled or dies, the ESOP is typically required to buy back the shares from the departing employee at their current fair market value. This process is known as a "repurchase obligation" and the timing and method of this transaction are defined by the ESOP's summary plan description.
‍

There are certain circumstances where employees might be able to diversify a portion of their ESOP shares into other investment options within the plan after a certain age and years of participation in the plan, which is often referred to as a “diversification option.”

It is also important to note that the liquidity of ESOP shares is generally limited, since the shares are not traded on a public exchange. The company itself, through the ESOP, is the market for buying and selling the shares.
‍

For precise details on when and how an employee can sell their ESOP shares, it is necessary to refer to the specific ESOP plan documents and consult with the plan administrator or a financial advisor familiar with ESOPs.

Yes, Employee Stock Ownership Plans are a type of retirement plan that empowers employees to own a piece of the company they are helping to build. When participants leave the company or retire, they are able to request a distribution from their account if they have met vesting schedule requirements. ESOP distributions are cash payments based on the current fair market value of the shares in the participant’s account at the time of distribution. The former employee receives cash and the shares are sold back to the ESOP sponsor, going back into the trust fund to be reallocated to remaining participant accounts. Keep reading about this topic in our blog.

ESOPs offer tax advantages that can significantly boost a company’s savings and benefits. 

‍

C-Corporation companies can benefit in the following ways: 

• Contributions used to pay ESOP loan interest are tax-deductible. Contributions used to repay ESOP loan principal can also be deducted from up to 25% of covered payroll.
• Non-elective contributions up to a further 25% of covered payroll can be deducted.
• Sellers owning at least 30% of the company stock can defer taxation on their gains. They can reinvest the proceeds from the sale in other securities and continue to defer taxation.
• Cash used to pay company stock held by an ESOP is deductible, so long as the dividends are used to repay the ESOP loan or are passed through to employees.

S-Corporation companies can benefit in the following ways: 

• Owners are not taxed twice on the ownership percentage held by the ESOP. Profits attributed to the ESOP are exempted from federal and sometimes state income tax. That means, for instance, that there is no income tax on 30% of the profits of an S-Corporation with an ESOP holding 30% of the stock, and no income tax at all on the profits of an S-Corporation wholly owned by its ESOP. Note, however, that the ESOP still must get a pro-rata share of any distributions the company makes to owners.
• If an S-Corporation is 100% ESOP-owned, the ESOP shareholder is tax-exempt from federal income and most state income tax. However, ESOPs must provide broad-based employee coverage to prevent abuse, as per Section 409(p).

‍

Read more on this topic here.

While ESOPs are implemented in companies across diverse industries, they may not be suitable for every business. ESOPs are available only to C-Corporations and S-Corporations. They are not recommended for start-ups and small businesses. Furthermore, there are cash flow requirements that must be met, which limits what is available for reinvestment in the company.

Yes, ESOPs can be combined with other retirement plans. Many companies offer an ESOP as a supplement to other retirement savings options, such as a 401(k) plan. This arrangement allows employees to diversify their retirement savings and benefit from different types of plans.

‍

Here's how ESOPs can work with other retirement plans:

‍

• Complementary Plans: An ESOP can complement a 401(k) or other profit-sharing plans. Employees can allocate their retirement savings between stock in their company through the ESOP and a more diverse set of investments available through a 401(k) plan.
• 401(k) Plan with ESOP Component: Some plans, known as KSOPs, actually combine the features of both a 401(k) and an ESOP into a single plan. This allows employees to have both employer stock and other investments within their 401(k) accounts.
• Sequential Plans: A company might establish an ESOP as a way to provide a retirement benefit in addition to a defined benefit pension plan that is being phased out, or as a transition from a profit-sharing plan.
• Multiple Plan Options: Companies may offer different plans for different groups of employees or allow employees to choose between an ESOP and another type of plan.

‍

However, it's important to note that while it's legally permissible to offer multiple retirement plans, there are certain tests and limits (such as non-discrimination tests for 401(k) plans and limits on the total annual additions to a participant's account across all defined contribution plans) that must be adhered to in order to keep the plans compliant with IRS regulations.

‍

As always, when structuring employee benefits, it is advisable for companies to work with knowledgeable plan advisors and legal experts to ensure all IRS and Department of Labor guidelines are followed, and the best interests of the employees are served.

All ESOPs undergo valuations, both at the initial creation of the ESOP (called a Feasibility Study) and annually thereafter. The annual ESOP stock valuation determines the fair market value of the company’s shares. ESOP valuations are completed by an independent appraiser, who then determines the fair market value of the ESOP’s shares. This article covers valuations in greater detail, including three methods normally used for valuations. 

Due diligence in an ESOP transaction means investigating if there are any potential problems that could make a transaction problematic, such as unclear property titles, undisclosed liens on assets, a failure to conduct a thorough business analysis of a proposed transaction, and more. Failure to perform due diligence, in cases where it may have turned up critical information, could lead to lawsuits by parties to the transaction. That’s why due diligence investigations look at accounting practices, corporate by-laws and other documents, laws, and regulations that could affect a transaction, the status of assets, pending litigation or regulation issues, and a company’s general business practices and financial conditions. Keep reading about this topic in our blog.

A corporate trustee is a professional organization responsible for managing and administering a person's trust assets according to the trust's terms.

A corporate trustee helps preserve family wealth and legacy by expertly managing and protecting assets within a trust structure.

A corporate trustee handles asset management, executes trust instructions, maintains detailed records, and ensures compliance with legal and regulatory standards on behalf of an individual.

Aegis Trust Company offers expert administration and trust management, personalized service, and a commitment to safeguarding your legacy.

In a delegated trust model, a single trustee handles these three key responsibilities: managing administration, making distribution decisions, and overseeing investments. 

‍

Conversely, in a directed trust model, these responsibilities are shared among multiple advisors, allowing specialized management of each area.

Directed trust services allow trust companies to split responsibilities, specifically focusing on administration and accounting, while investment management and other functions are handled separately. This approach gives the grantor of the trust the flexibility to designate specific roles to different advisors, rather than using a single entity for all trust functions.

‍

Aegis administers a variety of trusts, including: 

‍

Revocable Living Trusts: These trusts help avoid probate, protect privacy, and control inheritance distributions.

   

Dynasty Trusts: Designed to minimize estate taxes and facilitate wealth transfer over multiple generations.

‍

Decanting Non-New Hampshire Trusts: Allows the modification of terms in an irrevocable trust.

‍

Non-Grantor Irrevocable Life Insurance Trusts: Offers specific arrangements for life insurance policies.

‍

New Hampshire Asset Protected Non-Grantor Trust: Provides asset protection against potential creditors.