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Steps for assessing feasibility and setting up an employee stock ownership plan
John Vitucci is a principal and Timothy Desmond is a partner at
O’Connor Davies, a certified public accounting firm with offices in New York, New Jersey, Connecticut and Maryland. Both are members of the firm’s employee benefits practice.
An employee stock ownership plan (ESOP) can provide significant benefits to shareholders, management and employees of a privately owned business.
ESOPs provide businesses with financial liquidity and can be an alternative for business owners who might otherwise consider selling their company to a third party, such as a private equity group. ESOPs also provide employees with an ownership interest in the company they work for, and stock holdings that can grow into a valuable retirement benefit.
The government provides significant tax incentives for businesses to create ESOPs. Most studies show that asset growth in these plans outpace 401(k)s, and thus ESOPs can substantially augment participants’ retirement incomes. Given those factors, it's no surprise that the total number of ESOPs—and the number of employees they cover—has grown over the last decade, and that there are currently more than 10,000 ESOPs in the U.S.
Yet despite this recent upward trend, the number of ESOPs is still far below what it should be, according to most experts. Many industry pundits point to a lack of understanding of the complex workings of ESOPs as a chief reason these plans have not been more widely adopted as a profit-sharing tool.
The Benefits of Providing an ESOP
On the plus side of the ESOP ledger, employers should consider the following benefits:
When to Consider an ESOP
An ESOP can be created at any time in the life cycle of a business. Whether it is a newly formed private equity venture, a manufacturing business, an engineering firm or a mature family-run enterprise, ESOP integration is not conditioned by a business’s age.
Instead, the relevant characteristics of a business that may be ready to include an ESOP in its retirement portfolio include:
Every company’s corporate makeup and financial situation is distinct, so individual business valuations are critical in determining whether or not the inclusion of an ESOP is the right step for a given business. An ESOP cannot save a highly indebted business or one with a poor business model, but it can be a powerful tool for a company that exhibits the above qualities.
How to Create an ESOP
Best practices for ESOP implementation include:
Related News Articles:
Why Advisory Firms Need an Employee Ownership Plan,
On Wall Street, November 2015
IRS: Prototype ESOP Documents Now Allowed, Morgan Lewis, October 2015
Related SHRM Articles:
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