Some companies want a way to get stock to the broader base of their workforce (with some extra "oomph" for their senior people), that is deductible and coordinates with their existing shareholder strategies, but that isn't as complex as an ESOP. Yet others see the significant additional tax benefits of an ESOP strategy and are willing to handle the trade-offs to get it.
An Eligible Individual Account Plan (EIAP) is a good alternative for a C corporation that wants to share stock with its employees but does not want to have the plan borrow money to buy the stock. It’s actually a custom-designed profit sharing plan statutorily permitted to invest up to 100% of assets in company stock.
Why Some Business Owners Choose EIAPs
EIAPs work very well for companies in certain industries such as construction, engineering and consulting, insurance, distribution, and manufacturing. They’re also a good alternative for companies that might need an ESOP in the future but haven't yet reached ESOP "critical mass."
So employers choose them for a number of reasons, both for what the EIAP can do and what it doesn’t require them to do as compared to an ESOP:
- Allocations may favor more senior employees with "age weighted" or "cross tested" formulas for the maximum permitted discrimination, and not just in proportion to compensation.
- Participants do not vote shares unless you want the plan to allow this.
- An annual third party appraisal is recommended but not required, and can be done through a valuation formula.
- Promissory notes may be given for share buybacks. This gives the company additional flexibility in paying out distributions from the EIAP.
- Distributions to participants can be made in cash or shares (eliminating the need for the company to redeem those shares, or preventing former employees from owning stock).
- EIAPs may start distributions at any date up to normal retirement age, not at the potentially earlier ESOP timeline. Payments may be set in the plan at any schedule and may mimic buy-sell agreements.
- An EIAP can be converted to an ESOP when the time is right for a company seeking the special tax incentives and other features available only to ESOPs.
- Employees can purchase company stock in the EIAP using employer cash contributions or employee cash contributions similar to a 401(k) deferral. This flexibility allows employees to choose whether to defer cash to the EIAP to purchase company stock.
If you're interested in exploring whether an EIAP could work for your company, contact an expert at Employee Benefits Law Group to learn more.