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by Corey Rosen and Scott Rodrick
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Format: PDF, 142 pages
Edition: Updated reprint (May 2012)
Status: Available for electronic delivery
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An Overview of How ESOPs Work
Selling to an ESOP in a Closely Held Company
ESOPs in S Corporations
Things to Do with an ESOP Besides Buying Out the Owner
ESOP Valuation Issues
Financing an ESOP
ESOP Distribution and Diversification Rules
Choosing Consultants and Trustees
ESOPs, Corporate Performance, and Ownership Culture
From "An Overview of How ESOPs Work"Plans have one or more "entry dates" for employees once they become participants. An employee who has satisfied the plan's minimum age and service requirements must begin participation in the plan not later than the first of (1) the first day of the plan year beginning after the date on which the requirements were met or (2) the date six months after the date on which the requirements are met. Participation can begin at an earlier date, however. Many plans, for example, have entry dates every six months or every year, and employees become participants at the first entry date after requirements are met.
Shares are allocated to individual employee accounts based on relative eligible compensation. Generally, all W-2 compensation is counted, but there is leeway to define compensation differently, such as by excluding bonuses, provided that it does not favor more highly compensated individuals; on a more level formula, such as per capita, by seniority, or by placing a cap on pay that can be considered; or some combination of the two, such as one point for seniority and one for relative pay. If relative pay is not used, however, plans must be tested annually to determine whether any highly compensated individual, generally defined as someone belonging to either the top 20% by payroll in the company or those making more than $105,000 per year (as of 2008), is receiving more than what the relative pay formula would indicate. In that case, the excess must be returned to the plan and reallocated to other participants. Finally, ESOP allocations can be used as a match to employee deferrals to a 401(k) plan, in which case all or part of the allocation may be determined by how much the employee defers. This approach requires complex anti-discrimination testing for both plans. Relatively few ESOPs use this approach.