Employee Stock Ownership Plan (ESOP) Administration

TPA Solutions specializes in employee stock ownership plan (ESOP) design, plan administration, and consulting. We help companies administer ESOP services by balancing the needs of owners, companies, and employees to create successful, sustainable employee ownership outcomes.


Introduction to ESOPs

ESOP

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.


ESOP Design

Building the Best Solution for Each Business

Once you’ve decided to implement an ESOP at your company, TPA Solutions offers comprehensive services and support to guide you through the design of your ESOP.

Designing the plan.

Like other qualified employee benefit plans, ESOPs must comply with applicable laws, including ERISA. Within the specified legal rules, plan sponsors must make important decisions regarding the plan terms to make sure that the ESOP fits well into the company’s corporate culture, cash flow needs, and strategic goals. Legal counsel should be consulted to prepare the required ESOP plan documents, including the agreement with the ESOP Trustee.

ESOP Third-Party Administration (TPA)

ESOP third-party administration (TPA) is a proven strategy for simplifying the administration of your ESOP. ESOP TPA services include all recordkeeping and reporting requirements as well as the day-to-day operations of an ESOP. ESOP TPAs advise trustees on critical ESOP decisions, from voting shares to repurchase obligation. They also take the lead in recordkeeping and preparing critical reports, including Form 5500, 1099-R, and trust accounting details. ESOP TPAs stay on top of the latest laws governing ESOPs, providing valuable insight for getting the most out of ESOPs.

TPA Solutions provides high quality ESOP TPA and recordkeeping services to fit your needs. Our simple, transparent fee structure adds an unsurpassed level of confidence to your ESOP plan administration. Let our experienced ESOP TPA professionals help your ESOP plan achieve better results while saving you time and money.

TPA Solutions’ full-range of ESOP TPA services provide ESOP and manage a variety of reporting and compliance requirements.

ESOP Navigator Software

With ESOP Navigator, TPA Solutions streamlines and automates many of the administrative requirements associated with ESOPs. This powerful software solution can be customized to align with your company’s brand and personality. Whether you choose to tailor it or use it “off the shelf,” you benefit from enhanced speed, efficiency, and accuracy.

KEY BENEFITS: PLAN PARTICIPANTS

ESOP Navigator empowers plan participants to:

  • View and print ESOP statements and other company ESOP communications
  • Update contact information
  • Download ESOP administrative forms
  • Access educational ESOP resources (including video) and links to helpful websites

KEY BENEFITS: PLAN SPONSORS

ESOP Navigator eases the administrative burden by enabling plan sponsors to:

  • Support "paperless" electronic delivery of benefits statements, Summary Annual Report, and other required disclosures
  • Facilitate online voting
  • Maintain a "fiduciary library"
  • Distribute ESOP information, updates, and announcements—including distribution forms—in a highly efficient manner
  • Receive ESOP forms from participants

ESOP Consulting Services

ESOP consulting is a key service brought to you by the ESOP experts at TPA Solutions.

Let our specialized ESOP consultants guide you through the complexities of initial ESOP design, long-range benefits, and ESOP tax planning. TPA Solutions’ ESOP consulting services help to ensure that your ESOP continues to run smoothly and in sync with your company’s financial goals.

Our team of ESOP consultants can help you to:

  • Integrate the ESOP into your company’s financial and strategic planning process
  • Plan and budget for annual ESOP benefits and repurchase liability in the future
  • Develop ESOP distribution policies to help your company achieve its goals while strictly adhering to the latest compliance standards
  • Deliver modeling and guidance related to ESOP loan modifications
  • Model plan funding and design strategies
  • Conduct repurchase obligation studies
  • Resolve compliance issues

ESOP FAQ

How do ESOPs work?

Employee Stock Ownership Plans (ESOPs) are also known as Employee Share Ownership Plans. ESOPs provide a company’s workforce with an ownership interest in the company by allowing them to provide their employees with stock ownership, often at no up-front cost to the employees. ESOP shares, however, are part of employees’ remuneration for work performed. They’re allocated to employees and may be held in an ESOP trust until the employee retires or leaves the company. The shares are then sold. ESOPs are regulated by Employee Retirement Income Security Act (ERISA), a federal law that sets minimum standards for investment plans in private industry.

7 Key ESOP Points

  1. ESOPs are a highly-tax-favored way for employees to share ownership in their company through a trust fund.
  2. Companies make tax-deductible contributions to the ESOP. Contributions are either allocated to participant accounts or used to repay the ESOP loan.
  3. When a portion of the ESOP loan is paid, a portion of the shares is allocated to participant accounts.
  4. ESOPs allocate shares to each eligible employee every year, giving employees an increasing ownership stake as they gain seniority.
  5. The ESOP distributes these shares to employees to fund their retirement.
  6. All ESOP rules balance two competing interests—that they’re flexible enough so that employers will be willing to set an ESOP, but not so flexible that they’re easy to abuse.
  7. An ESOP company is worth what a willing buyer would pay for the company to have the rights to its future earnings and its current assets.

How does an ESOP work for employees?

An ESOP opens when a company sets up a trust and makes tax-deductible contributions to it. Each company needs to determine how to allocate ESOP shares to each employee. Some employers look at years of service, while others look at annual compensation. These factors and others can be combined into an allocation formula to divide up the stock into each employee’s account.

Once the ESOP allocation formula is determined, a vesting formula also must be created. This formula will determine how the employees’ share value will be calculated upon leaving the ESOP. ESOPs must not discriminate in their operations in favor of highly compensated employees, officers, or owners. In an ESOP, a company sets up an employee benefit trust, which it funds by contributing cash to buy company stock, contributing shares directly, or having the trust borrow money to buy stock. Generally, at least all full-time employees with a year or more of service may participate in an ESOP.

ESOPs allow employees to defer taxes on the contributions until they receive a distribution from the plan when they leave the company. They can roll the ESOP funds over into an Individual Retirement Account (IRA), as can participants in any qualified plan.

How does an ESOP work for business owners?

All ESOPs are governed by trustees that have a fiduciary duty to administer the trust and oversee the plan. ESOP trustees are typically upper management in the company. 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 ESOP debt service with pre-tax dollars.

How does an ESOP work 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.

TPA Solutions can help you with ESOP recordkeeping, financial reporting, and more.


Ascensus Sales Team

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