It is not an easy job market for employers.
Economists recently calculated there’s a 5.3-million worker shortage, and there’s little expectation for it to go away. So it stands to reason that job seekers want more than just competitive salaries and maybe a 401(k) plan. Today’s job candidates want to work for companies that go the extra mile for employees.
To navigate the labor gap and remain competitive, businesses need to offer well-rounded benefits packages that add tangible value to employees’ lives, plus a return on investment for the company.
Here are a few key areas where employee stock ownership plans, or ESOPs, excel:
- Employee wealth accumulation
- Tax benefits
- Enhanced retirement income
- Employee engagement
- Differentiation via a unique investment
That’s a lot of holistic value from one qualified benefit plan. In fact, few (if any) benefit options offer the same breadth of advantages to workers and employers as an ESOP can. So let’s look closely at each of these five advantages.
ESOP Basics: A Unique Qualified Retirement Plan
An ESOP is a tax-qualified employer-sponsored retirement plan that gives plan participants beneficial ownership through the allocation of company shares to an ESOP account. As the company grows and its value increases, employees’ ESOP accounts increase in value. After they leave the company, fully vested employees receive a plan distribution equal to the value of their ESOP account.
But ESOP benefits don’t begin when an employee receives a distribution. While working, employees get a chance to develop a sense of shared ownership and belonging—without having to contribute their own funds, unlike most other retirement savings plans. And you’d be hard-pressed to find another employee benefit that can also foster a stable and predictable ownership transition at the time of a company sale.
Wealth Accumulation At No Cost to Employees
Building wealth is challenging, and the bottom 50 percent of U.S. workers have yet to recover from the losses they incurred in the first decade of the 2000s — and the upper middle class is still struggling against declining wealth. An ESOP can help move the needle for employees because their account contributions are made by the company; they don’t impact an employee’s paycheck.
From a regulatory compliance standpoint, ESOPs are permitted but not required to allow plan participants to take loans against their account balances. In practice, very few ESOPs allow such loans, and those that do have strict limitations. In addition to regulations that require loans be repaid within five years, limits to ESOP loans help plans protect account values over the long term, maximizing participant outcomes at distribution.
Wide-Ranging Tax Benefits
An ESOP’s tax advantages start with the selling stakeholder and extend to the ESOP-owned C or S corporation, but plan participants get tax benefits, too. Employees don’t pay income taxes on their ESOP account contributions until they receive a distribution. If participants choose a rollover at distribution, they can defer taxes further to grow their savings until they withdraw their funds in retirement.
And because it’s a qualified plan, C corp ESOP companies’ ESOP contributions are tax-deductible, and a 100% ESOP-owned S corporation isn’t subject to federal income tax — creating a competitive cash advantage that supports business growth.
Enhanced Retirement Income
The median U.S. retirement savings for 65- to 74-year-olds is about $426,000. Over a 25-year retirement, that’s about $17,000 in annual income.
Financial security in retirement takes discipline, planning, and for many workers without generational wealth, good luck and a generous employer. A 2018 study found that S corp ESOP participants’ retirement balances were more than double the national average. And, 97% of ESOP companies offered at least one other retirement plan in addition to the ESOP. And between 2002 and 2019, S ESOPs saw higher return rates than the stock market.
Nothing can guarantee retirement income security, but ESOPs are helping workers look forward to more comfortable golden years. And that fosters goodwill and loyalty.
Employee experience is a growing driver of recruiting and retention success, and it’s tough to beat ownership as an engagement tool. And participatory management styles (along with open-book management) are an ideal fit for many ESOP companies. In fact, a 2022 study found that ESOPs in food-related industries were much less likely to view employee retention as a challenge than non-ESOPs (6% and 22%, respectively).
And our own ESOP Partners data supports earlier ESOP research that correlates high engagement in employee ownership culture with improved business valuation outcomes.
Differentiation Via a Unique Investment
An ESOP company is by definition different from non-ESOP competitors: it’s partially or wholly owned by the ESOP trust on behalf of employee-owners. Does employee ownership have tremendous power to support a positive, engaged work culture? Yes — but an additional retirement benefit at no added financial cost to employees can be uniquely valuable in recruiting and retaining an excellent workforce.
Earning an ownership stake in the company through their work is an investment they can see growing from an insider perspective. They can see how their work contributions are the growth engine for their ESOP accounts. While the ESOP benefit’s diversification option kicks in closer to retirement to allow participants meeting certain conditions to reinvest a diversification distribution, an added source of retirement funds can help diversify an employee’s overall retirement portfolio.
That’s after the ESOP sale enabled the selling shareholder to access liquidity from their business to invest in diverse wealth-generating opportunities (or just enjoy) while helping the team navigate the leadership transition for as little or as long as they want to.
Putting the Power of an ESOP to Work
It’s an innovative approach to retirement benefits that allows employees to be invested in their company's growth and success while contributing to their own future financial security.
When you incorporate employee ownership into your benefits offering, you’re offering a benefit you know they’ll value. And as the job market continues to evolve, the holistic benefits of an ESOP will help keep your organization competitive, raising the standard for employer-sponsored retirement benefits and improving retirement readiness for you and your employees. Learn more about what benefits employees value most. Just click below for our survey report.