ESOPs are not required to invest exclusively in company stock. Kevin Long explains.
The statute only requires that an ESOP be primarily invested in employer securities and presumably, that means over the life of an ESOP.
The trustee is required by law to also prudently invest all of the assets of the ESOP. Very often an ESOP will carry a significant amount of cash in its trust which it might be, for example, investing for the purposes of future repurchase liability needs or for the purposes of the future transaction. And when an ESOP is holding nonstock assets, they must be prudently invested according to what the investment policy for the plan says and what’s appropriate to meet the ESOP’s objectives.
ESOP Explained: Learn More
ESOPs are very similar to profit-sharing plans, except that they must be primarily invested in company stock. Put simply, they are a form of a retirement plan that allows employees to invest in the companies they work for. They provide great retention and motivational benefits. They also provide tax deductions and tax subsidies that no other plan can match for funding benefits.
Explore answers to all your ESOP questions in Our Employee Stock Ownership Video FAQs.