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4th ed. (2005). 220 pp. (6" x 9"), softcover. $25 for NCEO members; $35 for nonmembers.
This book is a general guide to employee stock ownership plans (ESOPs) in both private and public companies. It is written more for the person who wants a straightforward primer on these issues than for the person who wants detailed technical coverage.
For detailed coverage of the Section 1042 "rollover" and other issues for selling owners and their advisors, see Selling to an ESOP. For detailed coverage of contribution limits, accounting, due diligence, etc., in leveraged transactions, see Leveraged ESOPs and Employee Buyouts.
Preface
An Overview of ESOPs
Using an ESOP for Business Continuity
ESOPs in S Corporations
ESOP Feasibility for Closely Held Companies
Anticipating and Avoiding ESOP Financing Obstacles
Creating an ESOP You Can Live With
ESOP Valuation Issues
Choosing Consultants and Trustees
ESOP Distribution and Diversification Rules
Questions and Answers on Operating an ESOP
Things to Do with an ESOP Besides Buying Out the Owner
ESOPs and Corporate Performance
ESOPs and Corporate Governance
An Introduction to Ownership Management
ESOP Case Studies
When the ESOP rules and the general qualified plan rules interact, the rule that would produce an earlier distribution governs. In general, the ESOP rules tend to require distributions to be made earlier, so the interplay of the ESOP rules and the general qualified plan rules usually results in an earlier distribution than would be the case in a non-ESOP plan. For example, suppose that an ESOP’s plan year is the calendar year and its normal retirement age is 65. Sally Jones retires in 2002 at age 65, having been in the plan for seven years (since 1995). Under the general qualified plan rules, she could have to wait until 2006, which is the year after the 10th anniversary of her participation in the plan, for distributions to begin. However, the special ESOP rules mandate that her distribution begin in 2003, the plan year following the plan year of her retirement.
Sometimes the general qualified plan rules require an earlier distribution than the ESOP rules would require. For example, suppose again that the ESOP’s plan year is the calendar year and its normal retirement age is 65. Fred Smith, who has been in the ESOP for 15 years, quits in 2002 at the age of 64. Under the ESOP rules, Fred would potentially have to wait until the sixth year after that (2008) for benefit distribution to begin. However, the general qualified plan rules override the ESOP rules because when Fred reaches age 65 in 2003, the three conditions given above will all have occurred (age 65 or retirement age, 10th anniversary of participation, and termination of service). Therefore, Fred’s distribution must start no later than the 60th day of 2004 (i.e., the 60th day after the plan year, 2003, in which the latest of those three events occurred).
When Louis Kelso created the ESOP back in the 1950s, his vision was that companies would use it to finance new capital. They would borrow money to buy machinery, buildings, land, and other productive assets that would pay for themselves in extra corporate earnings. By financing the loan through an ESOP, employees would share in the additional ownership value this capital created.
In practice, this has been used less often than Kelso hoped, but it is an important part of many ESOP companies’ strategies. Say that a printing company wants to buy a new $500,000 press. Normally, it would borrow the money and deduct the interest. With an ESOP, it would have the ESOP borrow the money (technically, the loan would usually go to the company, which would relend it to the ESOP). The ESOP would use the $500,000 loan to buy new shares in the company, and the company would use the $500,000 to buy the press. The company would then repay the loan by making tax-deductible contributions to the ESOP, thus deducting both principal and interest. As the loan was repaid, shares would be allocated to employee accounts. Other owners would suffer a dilution in terms of the percentage of the company they owned, but if the press proved to be a good investment, the company would gain at least as much in value as was invested (here, $500,000), so the value of their stock would not be any lower, and it could be higher thanks to the tax break and possible additional employee productivity.
Copyright © 2005 by The National Center for Employee Ownership (NCEO) (phone 510/208-1300; email nceo@nceo.org; WWW http://www.nceo.org/). All rights reserved.
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