Employee Benefit Plans: The 411

Valuable Information on 401ks, Pensions, ESOPs, Form 5500 Preparation + More

Is an ESOP Right for You?

An employee stock ownership plan (ESOP) is a qualified retirement plan that invests primarily in employer stock.  Let’s look at a few of the pros and cons of an ESOP.

Pros

  • Contributions to an ESOP are expenses for the contributing corporation for tax purposes.
  • ESOP companies are less likely to be disposed of by sale, merger or liquidation.
  • Employee ownership can boost morale, reduce turnover and can be a great selling point when recruiting new employees.
  • ESOP company employees usually earn a better compensation package.

Cons

  • Many ESOP stock sales are at least partially seller-financed (many times up to 50%).
  • The obligations of cash flows for setup, debt payments (financed purchase), audits, appraisals, and retirement payments.
  • The sale of a company to an ESOP may not always be the best deal for the stockholder.
  • The cash paid to a third party administrator and internal manpower for administration as well.

As you can see, there is a lot to consider when deciding whether or not an ESOP is right for your business and the full list of pros and cons is much longer.

Bobby Mikkelsen