Employee Stock Ownership Pl ESOP And ESPP Case Study

According to the 2010 Census there were 27.9 million small businesses in the United States. Many of these companies are closely held organizations that face the question, who will run this company in the future. Some are family owned businesses that plan to leave the next generation the reins of the company. There are other companies that hope to leave the business to employees that were instrumental in the company’s success over the years. While some will outright sell the business and walk away into the warm sunsets of Florida or Arizona. All these companies face the same issue, what is the best plan to handle the succession of the business.

There are a number of options to choose from, Employee Stock Ownership Plan (ESOP), Family limited

So what are the differences between an ESOP and an ESPP? With ESOPS the employee receives the stock of the company without needing to purchase them, while ESPP have the employees purchase the stocks with after-tax wages. Closely held companies usually implement ESOPs, while publicly held companies go with ESPPs. Another significant difference is when the funds are available to the employee in that ESOPs the employee must retire or leave the company in order to sell the stock while ESPPs allow the stock to be sold as soon as the vesting period lapses. ESOPs tend to have more tax advantages than an ESPP, but have higher start up and administration

ESOP is a stock bonus plan which is qualified, or a stock bonus and a money purchase plan both of which are qualified under section 401(a), and which are designed to invest primarily in qualifying employer securities; and section 409 Qualifications for tax credit employee stock ownership plans. ESOPs falls under IRC section 401 qualified pension, profit-sharing, and stock bonus plan and IRC 501 exemption from tax on corporations, certain trusts, and etc. which has 15 and 16 paragraphs respectively and a number of subparagraphs in each. This without a doubt is some of the lengthiest amount of regulations with a number of subparagraphs. Section 401(a) deals with the standards needed to meet the qualification, contribution limit on Owner-Employees, and cash or deferred arrangements to name a few. Under IRC Section 501(a), the trust which holds the ESOP shares is treated as a tax-exempt trust. Profits allocated to shares that are held by an ESOP are not taxable at the trust level.

A plan can’t be considered an ESOP if does not meet the requirements of IRC section 409. This especially true if a put option is not available to an employee as required in section 409(h). Section 409(o) has distribution and payment requirements. There are also regulations on S Corps that own ESOPs in section 409(p). This regulation is directed towards not allowing distributions to disqualified persons such as family members and individuals that own at