An Employee Stock Ownership Plan (ESOP) is a benefit plan allowing employees to buy or earn stock in their employer’s company.
How Do ESOPs Work?
Essentially, a company sets up a trust fund into which it contributes new shares of its own stock or cash to buy existing shares. Alternatively, the owner of a private company can use an ESOP to divest his own shares. In this scenario, the company can make tax-deductible cash contributions to the ESOP to buy out an owner’s shares, or it can have the ESOP borrow money to buy the owner’s shares. The owner’s shares are then placed in an ESOP Trust where they remain until the vesting period is over and the participating employee either exercises them, leaves the company, or retires.
What Are the Benefits of an ESOP?
Businesses using ESOPs do not pay taxes on their contributions of cash and stock to an ESOP. In addition, dividends are tax-deductible, whether they are used to repay an ESOP loan, passed through to employees, or reinvested by employees in company stock. And employees are not taxed on the funds they contribute to an ESOP, only distribution of their accounts. The employees can also roll their distributions into an IRA and further delay paying tax on the distribution.
The owners of privately held companies need not give up control of the company to utilize an ESOP — the company can continue to be run under their direction.
Using an ESOP can greatly minimize any problems related to limited employee incentives. The vesting period encourages employees to stay with the company for a longer period of time, and employers can also designate a larger portion of shares to senior employees compared to newer team members.
What Types of Disputes Arise from ESOPs?
ESOP disputes and lawsuits affect both public and private companies. The plan’s fiduciaries are required by law to act within their fiduciary duty by:
- Accurately valuing the stock
- Providing participants and beneficiaries with complete and accurate information
- Acting in the beneficiaries’ best interests during any transaction involving the ESOP
If your fiduciaries have breached their legal duty by selling their stock to the ESOP at an inflated price or acting outside of the plan’s best interests, you may have grounds for a lawsuit.
If you are involved in a fiduciary dispute, call us at 404-892-9797 for a case evaluation.
Gaslowitz Frankel LLC is Georgia’s premier fiduciary litigation law firm. Our legal team specializes in all aspects of fiduciary disputes, representing individuals, executors, trustees, investors, shareholders, and financial institutions in complex fiduciary disputes involving wills, estates, trusts, guardianships, businesses, and securities.
