We’re excited to work at an ESOP Company
Have you heard of an ESOP Company? What is it and why should you care? Let’s explore together on this ESOP learning journey.
What is an ESOP?
Benefits
How does it work?
Retirement Example
How can I make an impact?
FAQ
An Employee Stock Ownership Plan (ESOP) is a qualified retirement plan with defined contributions, funded 100% by the employer.
What (generally) is an ESOP?
What does that mean to me?
A retirement plan, similar to a 401(k)?
An ESOP provides retirement benefits to eligible participating employees in the value of shares of company stock. Employees of ESOP companies have beneficial ownership and the ability to share in the value of the company.
It means you can fully participate in your company's value in addition to receiving the benefit of a tax deferred qualified retirement plan. The value of the shares is based on the overall financial performance of the company.
Unlike 401(k)s, most ESOPs require no out-of-pocket contribution. The funding is handled by employer contributions.
Each year the employer makes a profit-sharing contribution to the ESOP.
Eligible employees are allocated shares of company stock to designate beneficial ownership based on compensation (up to the 2024 IRS limit of $345,000).
Shares of company stock held for participants entitle them to the value of those shares which is based on the performance of the company.
The shares accumulate over the years. Once an employee retires or leaves the company, the company buys back the vested shares in exchange for their current value.
Additional advantages include:
What are the advantages of working for an ESOP company?
Employees receive employer funded retirement benefits based on the performance of their employer. A participant’s actions as an employee can directly impact the value of the company and, therefore, the value of their retirement.
A stake in the success of the company.
A differentiated company culture.
Increased wealth and retirement assets across the organization at all levels.
You build long-term relationships.
Employees have a personal stake in how the company performs and work together towards a common goal. Beneficial ownership means sharing responsibilities and rewards.
ESOPs result in more engaged professionals and increased commitment to helping peers.* Ownership is shared across the company and not just held in the hands of a select few.
*Source: Rutgers Institute for the Study of Employee Ownership and Profit Sharing
The average ESOP account balance is more than double the average 401(k) account balance at a closely held, matched non-ESOP company offering only a 401(k) plan.*
*Source: National Center for Employee Ownership
People stay at ESOP companies longer allowing for deeper relationships to develop. The median tenure of an ESOP participant is 46% greater than a non-employee owner.* Turnover at ESOP companies is three times lower than at conventionally owned businesses.**
*Source: 2018 Update - NCEO NLS (ownershipeconomy.org)
"When you own a stake in the company where you work, you have an unbeatable opportunity to build a better tomorrow for yourself and your family.”
JIM BONHAM President, Employee Ownership Foundation
**Source: Rutgers Institute for the Study of Employee Ownership and Profit Sharing
A stake in the success of the company
A differentiated company culture
Increased wealth and retirement assets across the organization at all levels
You build long-term relationships with your peers
ESOPs result in more engaged professionals and increased commitment to helping peers.
Source: Rutgers Institute for the Study of Employee Ownership and Profit Sharing
“When you own a stake in the company where you work, you have an unbeatable opportunity to build a better tomorrow for yourself and your family.”
Cite source
On average, ESOP payout levels are 3x to 7x greater than 401(k) plans.
Jim Bonham, President, Employee Ownership Foundation
People stay at ESOP companies longer allowing for deeper relationships amongst peers. Turnover at ESOP companies is three times lower than at conventionally owned businesses.
EXAMPLE MILESTONES BASED ON 6-YR VESTING
Eligibility to Enter the Plan
Years 2-5
Year 6
Exiting Before Retirement
Retirement
An employee must be over 21 and have completed one year of service (measured from date of hire) with the employer to enter the ESOP. Each year ESOP participants will participate in the annual allocation of shares if they are employed on December 31st and complete 1,000 hours of service in the year.
For each year of service, beginning in year two, a portion of your shares will vest. Vesting refers to your right to receive plan benefits. Vesting occurs gradually over a 6-year period.
You will be fully vested in current and future allocations at 6 years of service.
When leaving the company before retirement, you will still have access to vested funds but payment may be delayed for a period following your exit from employment.
Happy retirement! You can now begin receiving distributions of the value of your vested shares. If you are over 62, you may be able to receive 100% of your balance the year after you retire.
Yearly allocations of beneficial ownership in the form of shares of company stock at an ESOP owned company can make a significant impact on your future. Here is an example of what it could mean for you.
Fictional company example: These numbers are for illustration only and are not a guarantee of performance.
Sarah ESOP Company
This example is based on the following assumptions: Employer 401K Contribution (3%), Annual Salary Growth Rate (5%), ESOP Contribution (10%), Share Price Growth (7%).
Company Shares
401(k)
$0
John Non-ESOP Company
Sarah and John accepted positions on the same day, each being hired at a salary of 100,000. Anticipated salary growth is 5%.
Year 0
$21,200
$6,150
Each company contributes 3% to the employee 401(k) plans.
Year 2
As an ESOP employee, Sarah also receives a percentage of her salary in company shares (at no cost to her) annually.
Company shares can grow in value over time assuming the Company performs well.
Hired November 2023
$80,317
$20,406
Sarah continues to receive shares each year. As the company grows, Sarah’s share also become more valuable. After 6 years, Sarah has over half a year’s salary in shares.
$1,020,539
$143,181
Sarah's long tenure at her company enabled her to accumulate substantial wealth throughout her career.
YEAR 25
It’s up to each of us to contribute to the success of the company. A few ways you can contribute:
Having a stake in the business sounds empowering, how can I make an impact?
Collaborate and share your ideas – everyone’s input is valued.
Make quality work a priority.
Recruit great people!
Studies show that 72% of Americans prefer to work for an ESOP company.
Source: Americans Want to Work for Employee Owned Companies | Employee Ownership Foundation
Foster strong and lasting connections with clients.
Help your peers! We’re all in this together.
Actively contribute to growth initiatives.
Identify ways to reduce costs and improve operational efficiencies.
Frequently Asked Questions
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How many ESOP companies are in the United States?
There are approximately 6,500 ESOPs, covering nearly 14 million employees.
How is an ESOP governed?
ESOPs are subject to regulations outlined in the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code. These regulations are in place to protect the interests of both employees and employers.
How is an ESOP different from a company’s 401(k) plan?
An ESOP invests primarily in an employer’s stock, while a 401(k) plan generally offers various mutual funds in which you can invest funds.
What does an ESOP cost me?
There is no cost to you. In most cases, ESOPs are in addition to other benefits.
Where are the employees' portions of the ESOP kept?
The company stock and cash (i.e., the assets of the ESOP) are held in an ESOP trust. This trust is an entity specially created for the ESOP, and your portion of the ESOP assets is recorded in an ESOP account established under your name. The assets are entirely separate from the assets of the employer (just like a 401(k) plan).
What is vesting?
The amount of time an eligible employee must work before being entitled to their retirement benefit.
How is the price of the stock in the ESOP determined?
The valuation of the company’s stock is conducted annually by an independent valuation expert. Factors that influence share value include the company’s financial performance and market condition.
How often will my ESOP account balance change?
Typically, your ESOP account balance will change once a year and you should receive an annual statement detailing the financial activity for that year. This statement should include the updated stock value.
When will an ESOP employee receive their vested shares?
After retirement or leaving the company.
Exploring an ESOP?
Learn how BDO’s team can help.
Test your ESOP Knowledge
ESOP Quiz
An ESOP is...
A qualified retirement plan governed by ERISA and the Internal Revenue Code
A retirement plan in which employees gradually acquire shares in the company
An employee stock ownership plan
All of the above
How is the price of company stock typically determined in an ESOP?
The stock price is set by the government
Employees vote on the stock price annually
It is determined by the company’s board of directors
It is based on the stock’s current market value
There are no costs to the employee associated with participation in an ESOP plan.
TRUE
FALSE
Participants vest in their ESOP shares over an 8-year period.
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