ESOP Administration: Release of Shares - Part 1 (General Rule)

Posted by Kevin Rusch on Thu, May 03, 2012

An employee stock ownership plan (ESOP) is a type of qualified retirement plan that buys, holds, and sells company stock for the benefit of the employees, providing them with an ownership stake in the company.  The ability of the ESOP to purchase company stock Creates an Internal Market and Built-In Buyer.

ESOPs are unique in that they are allowed to incur debt to purchase stock from other shareholders or from corporate treasury.  When company stock is purchased by the ESOP with the proceeds of an exempt loan, the shares are put into an ESOP suspense account as collateral on the loan.  Shares are released from the ESOP suspense account as loan payments are made on the ESOP debt.

One benefit of using ESOP loans to purchase stock is the share release provides a predetermined share allocation to the ESOP participants over the term of the ESOP loan.  A best practice is to structure the ESOP loan to assist a company in facilitating their desired benefit levels to the eligible ESOP participants.

ESOP plan documents will typically indicate the share release formula can be either of the two acceptable formulas, as defined in the Treasury Regulations Sec. 54.4975-7(b)(8):

  • General rule (also known as the Principal and Interest Method)

  • Special rule (also known as the Principal Only Method)

The General rule share release formula is based on principal and interest payments made on the ESOP loan:

(principal and interest paid for the year) / (principal and interest paid for the year + principal and interest to be paid for all future years)  *  shares in suspense

 Stay tuned for my next blog post on the Special rule option for releasing ESOP shares.

 

Topics: ESOP Administration

Kevin Rusch
Written by Kevin Rusch

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