Employee Stock Ownership Plans

The employee stock ownership plan is the most frequently used structure for broad-based employee ownership in the United States (ESOP). Around 6,500 companies in the United States have an ESOP, and approximately 14 million workers in the United States participate in an ESOP. ESOP is a type of retirement plan that invests primarily in company stock and places its assets in a trust for employees. It may own 100 percent or a small percentage of a company's stock. Participants in an ESOP (employees) accumulate shares over time and are compensated by having their shares purchased back, typically after they leave the company.

Employee ownership plans are most frequently used as a vehicle for business transition in closely held businesses. Congress has provided significant tax benefits in support of this strategy. Employee ownership is also frequently used to help attract and retain employees, build long-term wealth, and foster a high-engagement work culture in which employees are encouraged to think and act like owners.

ESOPs are frequently formed during the process of selling a business, as they can purchase the shares of a departing owner in pre-tax dollars at extremely favorable terms for the owner, the employees, and the business itself. Selling owners can contribute any portion of their stock to the ESOP and defer tax on the gain if certain conditions are met. Congress established incentives for ESOPs to borrow money (leveraged ESOPs), enabling them to purchase more shares than they could otherwise. ESOP transactions that are not leveraged are typically smaller and have lower transaction costs. Additionally, businesses can use ESOPs to reward and engage employees even if there is no selling owner.