Retirement Plans
Plan Types
Employee Stock Ownership Plans (ESOP)
Whether you use it as a tool for business succession planning, generation of additional capital, or an employee motivation and retention, Employee Stock Ownership Plans occupy a special space in the realm of qualified retirement plans.
US tax and labor laws require ESOPs to invest primarily in the sponsoring employer’s securities, and are the only employee savings plan that may use borrowed funds to acquire its asset – the employer securities.
Characteristics of ESOPs
There are essentially 3 “types” of ESOP arrangements:
- Non-Leveraged ESOPs
- Leveraged ESOPs
- Leveraged Buyout ESOPs
Non-Leveraged ESOPs
Non-Leveraged ESOPs do not borrow any type of funds in order to acquire the employer stock. The plan sponsor contributes cash or issues new shares of stocks to the ESOP. The cash and/or stock are allocated directly to the employees.
Typically, employer use Non-Leveraged ESOPs to promote growth of the company while preserving cash flow. The IRS allows a corporate tax deduction of the fair market value of the newly issued shares – an additional benefit.
Leveraged ESOPs
Leveraged ESOPs utilize corporate loan(s) to acquire newly issued shares of employer stock. The company pays back the principal of the loan(s) through contributions to the plan on a tax-deductible basis. The shares are released and allocated to employees as the loan(s) are repaid.
Leveraged ESOPs allow companies to enjoy a way to acquire capital goods or expand via merger or acquisition on a tax-advantaged basis.
Leveraged Buyout ESOPs
Similar to Leveraged ESOPs, Leveraged Buyout ESOPs acquire a loan to purchase shares of employer stock. Rather than issuing new shares of employer stock, Leveraged Buyout ESOPs typically buy the stock of a selling shareholder as a means of succession planning for closely held businesses. Again, the shares are released and allocated to employees as the loan is repaid.
Leveraged Buyout ESOPs provide an effective estate-planning tool for retiring shareholders. Structured correctly, the retiring shareholder may be able to defer capital gains tax on the sale, while the company benefit from purchasing the shares back using pre-tax dollars.
ESOPs require a thorough analysis of the company’s objectives and careful planning. Polycomp will work closely with your business advisors to structure a plan that will meet your company’s current and future needs.
To find out more about this type of plan, contact one of our Pension Consultants.