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Employee Stock Ownership Plans An ESOP is a qualified defined contribution plan in which the assets are invested primarily in qualifying employer stock. Purchases of this stock are generally funded by employer contributions made to the plan based on total employee compensation. In the case of a leveraged ESOP, the ESOP purchases employer stock using borrowed funds and the employer contributions to the ESOP repay the loan over time. An ESOP may permit the purchase of stock by employees as an additional plan option. When combined with a 401(k) plan, an ESOP is sometimes called a KSOP. The participant’s benefit is the participant’s vested account in the ESOP, which may include both employer stock and other investments. On termination of employment through separation from employment or retirement, the participant will receive all vested interests in the Plan. This will include both the employer stock and any other investments. At that time the participant will have the right to convert the employer stock to cash. In the case of many ESOPs sponsored by small businesses, the employer or the plan may retain the right to buy back any shares of stock that are distributed to participants. |
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