Three Reasons to Offer an ESOP to Your Employees

As the employment landscape changes, employers may search for benefit options that provide value to their employees and their business. One possibility that is sometimes overlooked is the employee stock ownership plan or ESOP. Similar to a profit sharing plan, an ESOP invests in the stock of the employer thereby creating a situation where the employer and employees share ownership of the business. Since ESOPs offer unique benefits to both employers and employees, consider the following three reasons to offer an ESOP to your employees.

Tax Benefits

Employers and employees may both enjoy tax-related benefits due to ESOP participation.

  • An employer’s contributions to an ESOP are tax deductible.
  • The ESOP can borrow cash to buy shares. The company makes tax-deductible payments that allow the ESOP to repay the loan.
  • Employees are not taxed on the ESOP contributions until they retire or otherwise leave the company.
  • Sellers in C corporations may receive tax deferrals after the ESOP owns at least 30% of the company’s shares.
  • The profits of an S corporation sponsoring an ESOP are exempt from federal income tax in an amount equal to the percentage of profits made from the ESOP.
  • ESOP dividends passed to employees or reinvested may be tax deductible.

Please note, though, that tax law is complicated. Consult with professionals before assuming that ESOP income, dividends, and contributions will result in advantageous tax treatment.

Employee Retention

Job seekers and current employees often make job decisions based, in part, on the employee benefit plan that is offered. An ESOP may allow employees the opportunity to increase their retirement savings. Also, an employee’s ownership interest in the company can make it more attractive to stay rather than leave.

Due to the low unemployment rate, it may become more difficult to attract new employees. Employee benefits plans can make or break a job offer. The unique benefits of an ESOP may help prospective employees in their decision-making process.

Retaining the Company Legacy

Business owners may find it difficult to leave the company they spent a lifetime building. ESOPs may allow top management and company founders to ease out gradually. The “low and slow” ownership transition also affords management time to adjust.

In addition, because employees may be more likely to stay with the company, they may help continue the company’s culture and beliefs.

Explore Additional Benefits of ESOPs

At Hall Benefits Law, we work extensively with ESOPs and other employee benefit plans. Please call us at 678-439-6236 to discuss your concerns with an experienced attorney. Our website contains more information about our firm, a Contact Form, and free resources for your review. From our home office in Georgia, we assist clients throughout the United States, from New York to New Mexico to California.

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Hall Benefits Law, LLC

HBL offers employers comprehensive legal guidance on benefits in mergers and acquisitions, Employee Stock Ownership Plans (ESOPs), executive compensation, health and welfare benefits, healthcare reform, and retirement plans. We counsel a wide spectrum of clients including small, mid-sized, and large companies, 401(k) investment advisors, health insurance brokers, accountants, attorneys, and HR consultants, just to name a few. HBL is passionate about advising clients, and we are dedicated to our mission: to provide comprehensive, personalized, and practical ERISA and benefits legal solutions that exceed client expectations.

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