Your First Year as an ESOP

Transitioning to an Employee Stock Ownership Plan (ESOP) is one of the most significant milestones a company can achieve.

Becoming employee-owned means more than a new ownership structure and governance requirements; it can also spark a shift in how your team thinks, communicates, and grows together. And your first year as an ESOP company is a powerful time for setting a tone and laying the groundwork for a thriving employee-owned enterprise.

The ESOP transition also impacts financial and legal obligations, and introduces new expectations for leadership and employees alike.

In this guide, we explore the immediate changes companies experience post-transition, and offer practical strategies to stay compliant, support business growth, and establish a strong culture of ownership during your pivotal first year as an employee-owned business.

ESOP Year 1: What Changes Right Away?

New Compliance and Documentation Requirements

ESOPs are subject to federal oversight, and your first year will be defined by several essential compliance obligations. Key among these are:

• Filing IRS Form 5500: This annual report provides critical information about your plan’s financial condition, investments, and operations, and is required by the Internal Revenue Service and the Department of Labor
• Filing Form 1099-R: You must report distributions from the plan to both participants and the IRS, ensuring proper tax treatment and recordkeeping
• Maintaining accurate participant records: ERISA mandates that employers keep thorough records for each employee, including data on eligibility, vesting, and benefit calculations, to support ongoing compliance and future distributions
• Performing annual nondiscrimination and coverage testing: These tests ensure that your ESOP does not favor highly compensated employees and meets IRS requirements for qualification as a tax-advantaged retirement plan

Many companies partner with a third-party administrator (TPA) to manage these tasks efficiently, helping clients maintain compliance and avoid costly errors, while allowing internal teams to focus on strategic business initiatives.

Annual Valuation and Share Price Reveal

Your first post-ESOP valuation is a compliance requirement — but your leadership can also make it a cultural milestone. Revealing the annual share price as an organization-wide event helps employees connect company performance with the tangible value of their ownership stake.

Repurchase Obligation: A New Long-Term Financial Commitment

As an ESOP company, you’re now responsible for buying back shares from vested employees when they depart. These obligations can grow significantly over time, and are impacted by a complex set of factors, from employee demographics to ESOP valuation. Conducting a repurchase obligation study early in your ESOP life cycle can help you strategically plan to meet your repurchase obligation. Expert analysis enables you to budget with confidence and avoid surprises down the line.

Meeting Fiduciary Standards

Your organization is now subject to regulation by the Department of Labor and the IRS. Fiduciaries and trustees are required by law to act in the best interests of employee-owners, and mistakes can lead to penalties or litigation. Partnering with ESOP-specific legal, financial, and insurance experts can help mitigate risk. Consult your trusted ESOP expert to ask about referrals.

Employee Engagement and Culture

Handing over share certificates isn’t enough to make employees feel like owners — or to help them understand the implications of employee-ownership through an ESOP.  It takes education and communication to build the “ownership mindset” that drives productivity and innovation. Help employees understand:

• What the ESOP means for their retirement
• How company performance affects their share value
• How their everyday contributions matter

Celebrating milestones like share price announcements and participating in Employee Ownership Month (October) can go a long way to reinforce a new culture expectation and nurture pride of ownership.

Adapting Governance and Leadership

ESOPs introduce new oversight responsibilities. With an ESOP comes a trustee, often independent, and sometimes changes to your corporate board structure. Transparency and communication become even more important.

The Importance of Succession Planning

It may feel like too soon, but it’s not too early to begin succession planning in year one. Why? A smooth leadership pipeline is crucial for business continuity and long-term stability. In your first year, begin succession planning conversations and document key roles and responsibilities. Identify future leaders, define key roles, and simulate what-if scenarios. In our experience, many ESOP leaders benefit from third-party, expert insight to ensure their succession strategy aligns with ESOP sustainability.

Best Practices for Success in Your First ESOP Year

Map Out Your ESOP Calendar

Map out all regulatory deadlines, key communications, and cultural events. Use tools like the ESOP Administration Timeline Planner to stay organized and on track.

Don’t Put Off a Repurchase Obligation Study

Knowing what to expect from future liabilities helps your leadership team plan responsibly. It supports strategic decision-making about hiring, capital investments, and benefit design. This is especially important if your ESOP has an internal trustee or is majority-owned. Talk to your trusted ESOP professional to set a timeline for your first repurchase obligation study.

Prioritize ESOP Education and Transparency

Expect employees to have lots of questions. Consider hosting a participant Q&A session within the first two months of ESOP launch. Then continue with small group trainings, email updates, or videos that connect the dots between their work contributions and share value.

Consider establishing an ESOP Communications Committee to help sustain this education long-term. This cross-functional team can support internal messaging, plan ownership-themed events, and serve as a bridge between leadership and employee-owners. It’s a great way to develop emerging leaders while reinforcing the cultural shift that comes with employee ownership.

Culture Calendar: First-Year Milestones

Looking Ahead: A Year of Unique Opportunities

Your first year as an ESOP company is your launchpad for long-term employee ownership success. By staying compliant, communicating openly, planning ahead, and empowering your people, you pave the way for stronger engagement, smarter governance, and a resilient ownership culture.

We know because we’ve helped organizations navigate every step of this journey — from administration and compliance to cultural alignment and communication. With the right support, your first year can become the foundation for decades of shared growth. 

Ready to explore what becoming an ESOP company could look like for your business? Download our guide to what to expect after becoming an ESOP and take a confident first step toward employee ownership.