For many people who are waiting to get their distributions from an ESOP, the process can be confusing. This guide is designed to help ESOP participants understand how distributions work, what they can expect, and what their rights are. It is also useful for ESOP companies, who can use this as a guide to educating employees about how distributions work in a variety of circumstances and what the participants' rights are in these matters.
Table of Contents
The Employee Retirement Income Security Act (ERISA) and ESOPs
What Is in Your Account and How It Gets There
How Are the Shares Valued?
How the Plan Is Governed
What the Company Has to Tell You About the Plan and Your Account
When Do You Have to Get Your Distributions?
What Happens When a Company Is Sold or the ESOP Is Terminated?
What Happens to My Account Balance After I Leave But Before It Is Distributed to Me?
How Will Distributions Be Made?
What Can You Do With What Is Distributed to You?
What Are the Tax Consequences of a Distribution?
Can I Get Any of My Money Out of the ESOP Before I Leave the Company?
What Can You Do If You Did Not Get What You Expected or When You Expected It?
Appendix: Excerpts from Department of Labor, What You Should Know About Your Retirement Plan
Companies may distribute your account balance in cash, stock, or some combination. You may get your distribution in a lump-sum (all at once) or in installments of either stock or cash.
In a lump-sum distribution, you will get everything in your account in one distribution. If you have stock and other investments, you could get the stock and a check for the value of the other investments. The company may also choose to cash in your stock just before the distribution is made so your distribution will be entirely in cash. Many ESOP companies have rules saying that they have the option to cash in your shares before distribution. They are allowed to do that if they are an S corporation (a common way to organize ownership of a company) or have a majority of their shares owned by the ESOP and/or employees. If they do not have this rule, then even if the company wants to make your distribution in cash, you can require it to be in stock, although few people will want to do this.
In an installment distribution, the company can make installment payments over five years. There are two kinds of installments. In one, the company gives you at least 20% of the stock in your account, plus 20% of your other investments, each year. It might also just pay out all the other investments in the first year. In either case, the value of the stock will vary each year.
In the second approach, the company will actually pay for the value of your shares in the first year of the distribution, but do this in installments. It will then pay you one-fifth of the value of your shares at the time distribution starts, plus interest, every year (in some plans, it could be fewer than five years). It will probably just give you the other investment account money in the first year, however.
For very large accounts (over $985,000 in 2011), a number that is adjusted each year, the company can extend the number of years in the installment by another year for each additional one fifth of the amount over $985,000 (so $197,000 in this case).
All installment payments of the second type must be backed by adequate security, meaning the company must have some real collateral to back up its promise to pay you.