An worker inventory possession plan, or ESOP, is an worker profit plan that offers staff shares within the firm they work for. Staff obtain the worth of these shares after they retire or depart the corporate.

There are literally thousands of ESOPs within the U.S., in accordance with the Nationwide Heart for Worker Possession, which maintains a database utilizing firm paperwork filed with the Division of Labor^[0]

ESOPs span industries, corresponding to manufacturing, science, expertise, finance, insurance coverage and actual property. Lots of the largest employee-owned corporations are supermarkets, building corporations, structure and engineering corporations, producers and well being suppliers.

Listed below are the essential capabilities of an ESOP.

• The corporate kinds an ESOP belief, which is a authorized entity that can maintain shares till they’re contributed to particular person worker accounts. 

• The corporate funds the belief with new shares of the corporate or money that’s used to buy shares from the corporate’s homeowners. An ESOP belief can also borrow cash to buy the corporate inventory (in that state of affairs, the corporate then makes tax-deductible contributions to the belief to repay the mortgage).

• The belief offers shares of the corporate to staff. Typically, staff who’ve at the least one 12 months on the firm obtain shares from the belief primarily based on their tenure, and people shares vest over time. Meaning it could actually take years for an worker to realize full rights to the shares they’ve obtained. Employees usually don’t pay taxes on their shares till they depart the corporate.

• The corporate buys again shares from former staff. When an worker with vested shares leaves the corporate, the corporate usually buys again the inventory, giving the employee money for the worth of the shares. Payouts might be delayed, although, relying on the plan’s design^[0]

  Nationwide Heart for Worker Possession. What Is an ESOP?. Accessed Jul 15, 2025.

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There are three frequent causes corporations have ESOPs.

ESOPs are mostly used to assist personal firm homeowners promote their stake within the enterprise. To do that, the ESOP belief purchases shares at honest market worth from a number of of the homeowners of the corporate, permitting that proprietor to go away the corporate with out promoting the enterprise to an out of doors purchaser. This may have its downsides as a result of although the ESOP pays honest market worth for the shares, a third-party purchaser is perhaps prepared to pay extra. Nonetheless, intently held corporations, corresponding to a household enterprise, could decide to promote the corporate to its staff (through the ESOP) as a means of defending it from outdoors consumers.

An ESOP might be an worker retirement profit, just like a 401(okay) or different worker fairness plan.

• ESOPs can provide staff possession within the firm, which helps align staff’ pursuits with firm success. Staff’ shares could develop into extra worthwhile if the corporate’s worth will increase.

• For workers, a bonus of an ESOP is that they get shares with out making any out-of-pocket contributions. However in contrast to different sorts of worker fairness plans, corresponding to restricted inventory models (RSUs), staff taking part in an ESOP can’t entry the worth of their shares till they retire or depart the corporate.

• As a retirement plan, ESOPs differ from different worker inventory possession plans in at the least one key means. Distributions could face tax penalties in the event that they’re taken earlier than age 59 ½ (although there are some exceptions)^[0]

An organization could create an ESOP if it’s searching for a cheaper strategy to borrow cash. The belief can borrow cash from a financial institution or different lender after which use it to purchase newly issued inventory from the corporate. The corporate then makes tax-deductible contributions to the ESOP, which makes use of the cash to repay the mortgage^[0]

There are benefits and disadvantages to ESOPs for workers at corporations that provide them. However remember the fact that every ESOP is ruled by its personal guidelines.

In case you stop your job, what occurs to your ESOP account relies upon first on how vested you’re.

• In case you’re partially or totally vested, you’re usually entitled to no matter portion of the account you’re vested in. Typically, the payout might be in money or shares, with the choice to promote the shares again to the corporate at honest market worth. When the payout happens — and what kind it is in, whether or not money or shares — relies on the plan’s design. ESOPs can delay payouts by as much as six years while you stop your job.

• In case you’re not but vested in your account (and also you haven’t reached your plan’s retirement age), you would possibly lose all rights to your ESOP when you depart the corporate.

To know when you’re vested in your ESOP, you’ll have to know the vesting schedule your plan makes use of.

• ESOPs generally comply with schedules that both vest progressively (so that you earn a proper to, say, 20% of the account per 12 months for 5 years) or suddenly (so that you earn a proper to 100% of the account after finishing a sure variety of years of service).

• If all or a part of your account is vested and also you stop earlier than age 59 1/2, you could possibly roll it into your subsequent employer’s retirement plan or into an IRA to keep away from paying a tax penalty on an early withdrawal^[0]