ESOPs are retirement plans. As such, ESOPs are required to follow all the basic rules for tax qualification and non-discrimination that other retirement plans such as 401(k)s must follow. As in a 401(k) plan, participants can roll their ESOP distributions over to another qualified plan.
Aside from those basic similarities, ESOPs are considerably different from other benefit plans. Most notably, ESOPs have advantages for employees that 401(k)s and other similar plans cannot match, including:
- The ability to make higher annual contributions to an ESOP than to other plans.
- The potential to receive significant dividends on the stock.
- Boosting job satisfaction thanks to a tangible connection between the employee’s retirement plan account and company success.
ESOPs also vary from other plans in some of the fundamental rules they must follow. For example, they are exempt from diversification rules, so they can be 100% invested in the employee’s company.
There are also different, specific ESOP distribution rules that help keep a company from being strapped for cash as its employees retire and start receiving distributions.
In addition to these differences, a well-designed ESOP can deliver tax advantages for companies and sellers that far exceed the tax benefits of a 401(k).
To capture all of an ESOP’s potential, work with experts who understand how to build a plan that accomplishes your goals.
Comparing ESOPs, Profit Sharing Plans, And Stock Bonus Plans
The National Center For Employee Ownership (NCEO) looks at how ESOPs, profit sharing plans, and stock bonus plans differ as employee ownership vehicles.