Profit sharing plans are an alternative to ESOPs. In our video, we’ll explain some of the differences between ESOPs and profit sharing plans.
ESOPs aren’t the only form of retirement plan that can buy or sell stock on a pretax basis. Most notably, profit sharing plans that meet the Eligible Individual Account Plan (EIAP) provisions of ERISA can also buy or sell stock and can actually do many things that an ESOP can’t do. Stock can be allocated using the more creative cross-tested formulas that are available to profit sharing plans.
They’re not tied to the voting rights pass-through rules of an ESOP, and distributions aren’t limited to the timing rules that apply to ESOPs. On the other hand, profit sharing plans don’t allow you to use leverage or financing to buy stock. But overall, it can be a very effective and often times more flexible device than ESOPs. Ultimately, it can create what might be considered a pretax buy-sell agreement for a corporation.
Learn More About ESOPs And The EIAP Alternative To ESOPs
Explore our Employee Stock Ownership Plan FAQs for answers to many of your ESOP questions.
The EIAP mentioned in this video 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.