Establishing an Employee Stock Ownership Plan ESOP 

With over 25 years of being a premier self-directed IRA provider, we have offered alternative products and tools for our clients to utilize from our conception. Among these products is an Employee Stock Ownership Plan, also known as an ESOP, or what Accuplan calls a ‘MYSOP’ (My Employee Sponsored Ownership Plan). Its purpose is to bring our clients more options in alternatives.   

What is an ESOP/MYSOP? 

An ESOP is a tax-advantaged vehicle, and it compares to a 401K but is more complex. An employer will set up a trust fund where the goal is to share their private stock or designate cash to buy existing shares, all within a tax-advantaged IRA. This type of account enables employees an opportunity to buy into their employer’s shares, and in turn, brings usable capital.  

These shares are issued to select employees. It is up to each company to choose how those shares are allocated.   

Like other employer-sponsored benefits, employees who have shares within the company are not considered fully vested until seniority has been attained within that company. If a vested employee does leave that company, their employer must buy back the vested stock at a fair market price.   

Tax Advantages 

An Employee Stock Ownership Plan has excellent tax benefits for the company that is hosting an ESOP. Stock contributions are tax-deductible, and employees pay no extra taxes on received contributions to the ESOP. In addition, they can roll over stock distributions into another tax-sheltered account like an IRA so that no income or capital gains taxes are piled onto them.  

ESOP and MYSOP Rollover Rules 

MYSOP distributions can be rolled over into another type of tax-sheltered retirement plan. Still, it’s important to note that the rules for distributions will vary from company to company as they see fit. Just the same as with a more traditional employer-sponsored retirement plan, there are IRS stipulated penalties for taking distributions before the proper retirement age is met.  

Each company can determine whether its MYSOP distributions are made through stocks, cash, or a combination of both. No matter what method is chosen, the employee retains the option of cashing in their stocks.  

Suppose an employee decides to roll over their funds into a retirement account like a traditional self-directed IRA. In that case, those funds won’t be subject to taxes until withdrawn upon retirement and will only be taxed as ordinary income.  

ESOP Contribution Limits 

2021 contribution limits to the ESOP, on the employee’s behalf, is limited to $58,000 annually, or 100% of compensation. 

ESOP Distributions 

Upon eligibility of receiving distributions from retirement plans, the employee has the right to take benefits in employer stocks, with some exceptions. The right to receive employer stocks does not extend to the portion of the employee’s account that they elected to have reinvested under the diversification rules.  

Employees who take a lump-sum distribution of their ESOP account in the form of employer stock may enable deferring further taxation of the value of that stock until they sell it at a later date. 

Frequently Asked Questions

If an employer terminates an ESOP, the employees have a couple of options. First, they can roll over shares into a self-directed IRA where they can continue to contribute and invest. Alternatively, there’s an option to take cash distributions from the dissolved ESOP.

Assets within an ESOP are generally company stock or cash, and they’re held in a specialty trust established for the ESOP.

Just as with traditional stockholders, ESOP participants share no personal liability for the debts within the company.