How Does an ESOP Work as a Qualified Benefit Plan & More? [VIDEO]

Many business owners interested in exploring their options for exit strategies are intrigued by the possibility of selling to an employee stock ownership plan, or ESOP.

When employees learn that the company where they’ve worked for years will become an ESOP, they may wonder, how do ESOP plans work — and how does this qualified retirement plan have the potential to benefit them?

How Does a Leveraged ESOP Work? Here's All You Need to Know

In terms of exit strategies for business owners, the leveraged employee stock ownership plan (ESOP) transaction is popular for several reasons.

Many owners of small to midsize businesses have all or nearly all their wealth tied up in their company. As they near retirement and want to diversify their investments, or experience other reasons for needing liquidity, they may explore options for selling some or all of their ownership stake in the business.

How is an ESOP Stock Price Determined at Sale and Annual Valuation?

For business owners who are evaluating exit strategies, the first question is often, “How much money can I get when I sell my company?” After all, getting liquidity out of the business is often a primary reason for selling to an ESOP.

The answer to this question is not always as simple as a sale price. Selling to an ESOP can involve tax benefits and sale structure advantages that can net a seller more over the long term than even a strategic premium third party offer can deliver.

An essential step is establishing fair market value for the business, which in turn determines the ESOP company stock price. The company stock price is determined on an annual basis by an independent appraiser, as required under Internal Revenue Code Section 401(a)(28)(c).

How an ESOP Can Help Solve Family Business Succession Planning Problems

When it comes to running a family owned business, succession planning is an often overlooked yet essential consideration. In fact, many family companies don’t last beyond a single generation. For those that do, succession planning is a must.

But the subject of ownership transition can be thorny in a family firm, and the issue can become even more complex when some children prefer to remain involved in the business while others pursue their own interests.

How Long Does it Take to Complete All the Steps for an ESOP Setup?

For many business owners evaluating exit strategy options, timing is a critical consideration.

The decision to sell to an ESOP and establish employee ownership is much more than a financial determination. An owner who chooses to set up an ESOP demonstrates a commitment to continuity, employee goodwill, and the ongoing success of the business.

Nevertheless, ESOP timing and timelines matter. A departing owner often wants to be able to predict a transition path, and employees appreciate a degree of predictability in any ownership transition scenario.

What Are the Ongoing Duties You Should Expect for an ESOP Trustee?

A key step in the process of establishing and structuring an ESOP (employee stock ownership plan) company is identifying, vetting, and selecting a qualified ESOP trustee. 

An integral part of the ESOP Corporate Governance process, the ESOP trustee holds an essential role as the legal shareholder of the shares held by the ESOP trust. 

This shareholder position is a fiduciary role that involves numerous, critical responsibilities.

So, what are an ESOP trustee’s fiduciary responsibilities? What about other ESOP-related trustee duties?

Here, we’ll walk through the fundamental duties and responsibilities of an ESOP trustee:

  1. Satisfy ERISA fiduciary responsibilities
  2. Engage the independent ESOP appraiser
  3. Establish the annual ESOP stock price
  4. Vote ESOP shares to select the board of directors
  5. Manage assets of the ESOP trust
  6. Ensure plan documents are followed
  7. Thoroughly document decision-making processes

It’s hard to overstate the importance of choosing a qualified ESOP trustee, given the need for due diligence in every decision related to ESOP transactions. ESOP trustee responsibilities, when properly executed, ensure regulatory compliance and a healthier ESOP company. 

2021 ESOP and Pension Plan Limits

The IRS has announced the 2021 pension plan limits, which includes the following: 

An ESOP is a Business Transition Tool

An ESOP is a Business Transition Tool

ESOP stands for Employee Stock Ownership Plan.  An ESOP is qualified retirement plan that can be used as a business transition tool and as an employee ownership instrument. 

An employee stock ownership plan (ESOP) is a business transition tool that establishes an ESOP trust to be an ongoing perpetual owner of the company.

What is an Employee Stock Ownership Plan (ESOP)?

What is an Employee Stock Ownership Plan (ESOP)?

ESOP stands for Employee Stock Ownership Plan.  An ESOP is a qualified retirement plan that can be used as a business transition tool and as an employee ownership vehicle:

An ESOP is a Business Transition Tool

An ESOP is a Business Transition Tool

ESOP stands for Employee Stock Ownership Plan.  An ESOP is a qualified retirement plan that can be used as a business transition tool and as an employee ownership vehicle.

An employee stock ownership plan (ESOP) is a business transition tool that establishes an ESOP trust to be an ongoing perpetual owner of the company.

Keep Your ESOP On Track and On Time
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