ESOP – That’s an Employee Benefit Plan, Right?

“Everything should be made as simple as possible but not simpler.” – Albert Einstein

Drive around town. Count the number of “Help Wanted” or “Now Hiring” signs. How long before you lose count?

Employers are pulling out the stops to find workers. Many offer signing bonuses for new hires. Others provide fat bonuses to employees for referring prospective workers. Cash remains king, right?

Once in the door, though, retaining employees becomes the new priority. Our last post examined how ESOPs can be a valuable employee retention tool. Giving workers ownership in their employer is a mighty powerful incentive.

So a question arises that typically follows right after…

“What is an ESOP?” Specifically, is an ESOP an employee benefit plan?

With apologies to Albert Einstein, the answer isn’t simple.

ESOPs certainly benefit employees. Being granted shares of company stock is a valuable commodity. Yet the practice isn’t common, by any means. Fewer than 7,000 ESOP companies operate in the U.S.

The IRS defines ESOPs as a “tool of corporate finance.” Employee benefit plan? No mention.

Employee Benefits Package
Image courtesy of Corporate Financial Inc.

Still, the benefit to employees is realized as the company utilizes this “tool.” An ESOP allows companies to leverage tax advantages that qualified retirement plans enjoy.

Funds put into an ESOP can be reinvested into the company. Thus, contributing newly-issued stock to an ESOP increases a company’s cash flow, because the “investment” in the plan is not taxed.

Similarly, a growing company that needs financing can have its ESOP borrow money. The ESOP uses the borrowed funds to purchase stock from the company, providing the company additional money for use. The original loan is repaid by the company with contributions to the ESOP … which happen to be tax deductible. Think any bank would offer a deal like this?

Limits? Of course. Contributions to an ESOP cannot exceed 25 percent of eligible payroll. If a company is a C corporation, there are no limits on the interest payments on an ESOP loan.

If all this sounds a bit complicated … well, it is (sort of). Contact Excel Legacy Group for a free consultation on how ESOPs work … and if one might work well for your organization. At a time where retaining talent is more important than ever, why not explore?

Legally, ESOPs are not an “employee benefit plan.” No doubt, though, that they provide benefits for employees. This is the truth – plain and simple.