Tags: Retirement | employee stock ownership plans | retirement

What Are Employee Stock Ownership Plans (ESOPs)

By    |   Wednesday, 12 August 2015 03:20 PM

Employee stock ownership plans, called ESOPs, are ways for employees to buy into the company that employs them as a retirement plan option. There are a number of ways to procure the stock. It might be bought directly, through stock options, or within a profit sharing plan. It could also be given as a bonus.

ESOPs often are implemented in private companies where a departing owner is leaving shares for sale, according to the National Center for Employee Ownership. As owners leave the company, employees provide a market for those shares to keep them within the company. ESOPs give employees a sense of ownership, offering effective ways to motivate and reward them. Through the purchase of company stock, companies can raise cash to acquire pretax assets. Stock option plans are found more in public companies where the stock can be held by employees or publicly traded.

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Employee stock ownership plans are defined contribution plans, according to the IRS. Each employee sets the amount to be contributed to the plan or receives stocks or stock options based on an approved-IRS plan, but there is no guarantee of the benefit or amount of money that will be realized by the contribution. Defined contribution plans usually allow pre-tax contributions by buying stock in specified amounts so that taxable income is reduced.

ESOPs often prove to be a very positive step for a company, according to the National Center for Employee Ownership. A 2000 Rutgers study suggested that ESOP companies can grow 2.3 percent to 2.4 percent more quickly than non-ESOP companies. The growth rate might increase 8 to 11 percent when combined with employee workplace participation programs and participating management practices.

ESOP participants make from 5 percent to 12 percent more in wages and tend to have three times the amount of retirement assets as employees of non-ESOP companies.

An employee owner not only benefits in the rewards but also shares in the risk. There is no guaranteed return on investment. If the company is failing or there is a decline in the industry, the return on employee-owned stock may suffer the same loss as a publically traded stock. It is very rare that employee stock ownership plans provide no return, Bankrate reported. Since it costs the employee nothing to invest in an ESOP, any free dollar is a net gain for a good investment in a retirement plan.

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Employee stock ownership plans, called ESOPs, are ways for employees to buy into the company that employs them as a retirement plan option. There are a number of ways to procure the stock.
employee stock ownership plans, retirement
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2015-20-12
Wednesday, 12 August 2015 03:20 PM
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