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Introduction to ESOPs


ESOP stands for Employee Stock Ownership Plan. ESOPs, like other employee benefit plans, offer advantages to business owners, companies, and employees alike.

An ESOP is a retirement plan designed to provide employees with an ownership interest in the company by investing primarily in stock of the employer. ESOPs are unlike other retirement plans, which typically diversify their holdings by investing in a variety of assets. The ESOP is funded with tax-deductible contributions by the employer, which can be in the form of company stock or in cash which is used to purchase company stock. An ESOP operates through a trust under the direction of a trustee or other named fiduciary.

ESOPs must be specifically designated as an ESOP in the plan document and must comply with special ESOP requirements of the Internal Revenue Service (IRS).


ESOP benefits for companies

An ESOP is a technique of corporate finance as well as an employee benefit plan. An ESOP can be used to finance ownership transition, raise new equity capital, refinance outstanding debt, or acquire productive assets. ESOPs can also be used to increase cash flow by making plan contributions in stock instead of cash. ESOP contributions are fully tax deductible, allowing employers to fund both the principal and the interest payments on an ESOP’s debt service with pre-tax dollars.

Dividends on ESOP stock are tax deductible if they’re applied to repay principal of the loan made to acquire the company stock on which the dividends were paid. Reducing loan principal with pre-tax contributions and dividends generates significant tax savings, which in turn increases the ESOP company’s cash flow. This favorable tax treatment means that ESOPs are effective vehicles for financing ownership transition.

There is strong statistical evidence that ESOP participation improves employee morale and productivity while reducing turnover. Surveys conducted by The ESOP Association show that most Association members report improved employee morale and productivity from their ESOPs.


ESOP benefits for stockholders

One of the most popular uses for an ESOP is to provide a ready market for some or all of the shares owned by shareholders in a closely held company. With an ESOP in place, a majority or controlling shareholder has an exit strategy when he or she is ready to retire. Likewise, an ESOP is often an attractive buyer for a minority shareholder in a closely held company. With an ESOP, a majority shareholder has the option of selling only a portion of his or her stock to increase personal liquidity while maintaining control of the company.


ESOP benefits for employees

Each year, company contributions to the ESOP, in cash or stock, are allocated to the accounts of participating employees in the trust established as part of the ESOP. The accumulated balance in a participant’s account is distributed to the participant after his or her retirement or other termination of employment with the company. So long as a participant’s account remains in the ESOP trust, the value of the account– including the appreciation in stock value–isn’t taxable to the employee.

Invest in your employees and your business with an ESOP. Let TPA Solutions’ first-class team of specialists manage your company’s ESOP.


Keep Your ESOP on Track

If your company has already established an Employee Stock Ownership Plan (ESOP), congratulations on completing the process and realizing some of the potential benefits of an ESOP. Moving forward, it’s important to keep your plan on track to ensure that it remains in compliance with Internal Revenue Service and Department of Labor regulations and also to address repurchase obligation and other mature ESOP issues that may arise.

At TPA Solutions, we deliver premier plan administration services as well as repurchase obligation, mature ESOP consulting services, and ESOP communication services. If you’re seeking expert support in keeping your ESOP on track, we invite you to learn more about our capabilities and expertise.


Expert Reporting and Recordkeeping for ESOPs and 401(k) Plans

As an HR administrator, you’re continually challenged to address a range of compliance requirements. Some of the most complex likely pertain to your company’s Employee Stock Ownership Plan (ESOP) and the need to keep your plan on track. If you’re seeking an experienced partner to help you navigate the complexity of plan administration from handling day-to-day inquiries to producing participant statements and preparing annual filings, turn to TPA Solutions.

We offer a team of compliance experts with years of specialized experience in ESOP administration. Our online administration tool, ESOP Navigator, streamlines and automates many of the core activities and communications pertaining to ESOP plan administration.

Our administration services cover all core recordkeeping and reporting requirements, including individual participant recordkeeping, preparation of Forms 5500 and 1099-R, Internal Revenue Code compliance testing, trust accounting, and combined plan testing.


For Advisors

TPA Solutions seeks to work with organizations that embrace a strategic and responsible approach to Employee Stock Ownership Plans (ESOPs). If you refer a client to us, we’ll collaborate with you to help address your client’s needs.


Supporting Your Clients

An increasing number of Baby Boomer business owners are now exploring and conducting ownership transitions and succession plans. Consequently, you may be receiving more inquiries about ESOPs, and you may need to identify an ESOP partner to support your clients’ needs.

At TPA Solutions, we welcome the opportunity to serve as a trusted partner for your clients who are seeking expert administration and recordkeeping services covering a full range of ESOP plan requirements.


Supporting Your Firm

TPA Solutions welcomes the opportunity to partner with CPAs, financial planners, bankers, and other professional advisors. We recognize that ESOPs can be complex, and are committed to helping you and your clients navigate them.

Contact us to schedule an in-house briefing for your firm for our ESOP experts to deliver an introduction to ESOPs seminar. Such briefings can be informal, or they can count toward continuing education credits for CPAs and financial planners.

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