June 2019

Start Here: ESOP Participants

Whether you’re a new hire or a 30-year lifelong employee, being an ESOP participant is often more beneficial and more confounding than working at a non-ESOP company. This page addresses some of the most common ESOP questions and concerns we’ve seen over the years.

Any questions you may have about your company’s plan or your ESOP account should be addressed to a member of your company’s ESOP committee or human resources department. Additionally, the U.S. Department of Labor, which along with the IRS enforces the laws governing ESOPs, has benefit advisors committed to providing individual assistance to participants and beneficiaries. Participants will receive information on their rights and responsibilities under the law and help in obtaining benefits to which they are entitled. Contact a benefits advisor by calling toll free at 1-866-444-3272 or electronically at

When Will I Get a Distribution After Leaving Employment?

For the most part, you receive ESOP benefits after leaving employment. The basic ESOP rules are as follows. The "plan year" is the ESOP's annual reporting period, which may follow the calendar year or be something different like July 1 to June 30. The plan's "normal retirement age" cannot be later than 65..

If you leave the company prior to death, retirement, or disability, then your distributions must start not later than five years after the end of the plan year you leave. The distributions can then be in equal installments for up to an additional five years. If you leave for death, retirement, or disability, the distributions must start one year after the end of the plan year that occurs. Again, they can be in installments over up to five years.

The distribution will either be in stock of the company or in cash if the company buys out your shares first. If you get shares, you can sell them back to the company at the fair market value determined by an outside appraisal firm each year. 

The rules described here are the slowest the company can make distributions. Some companies make distributions sooner. Because each plan varies, you should ask your human resources department for details.


How much will be distributed to you depends on two things: how much is in your account and how vested you are in that account. Vesting is the process by which you accumulate a right to your account. By law, you generally must be 100% vested based on one of two schedules:

No vesting at all in the first years, followed by a sudden 100% vesting after not more than three years of service ("cliff" vesting); or

Twenty percent vesting after the second year of service, with 20% more each year until 100% vesting occurs after the sixth year of service ("graded" vesting).

What Happens If My Company Is Sold?

In some cases, your company may be sold to another ESOP company. Usually, you would then have your ESOP shares rolled over into the shares of the new company ESOP. In other cases, the acquiring company will cash out your shares and roll the proceeds into an account in your name in its 401(k) plan. Finally, the company may purchase your shares and give you the cash (see the section below on taxes on how this is taxed).

How Do You Know What I Have?

By law, your company must send you an annual account statement telling you how much is in your ESOP in cash and in stock. The stock price is determined by an independent outside appraisal firm. If you do not receive a statement, contact the company's human resources or payroll department and request a copy.

What Form Will My Distribution Take?

The payment may be in a lump sum, meaning you get it all at once, or in installments, meaning you get it over time. If you get shares in installments, you get a portion of what is due to you each year in stock. The value of the shares will change from year to year. The company may also make cash distributions in installments by buying your shares when or before distrubution occurs then paying oyu out over time with interest.

If you leave and do not get a distribution right away, your account balance can be held in stock (meaning the value will change each year), cash, or some of both.

Diversification Rights Before Leaving the Company

As an ESOP participant, you have the right to diversify part of your ESOP account balance once you have 10 years or more of participation in the plan (defined as the ESOP or a predecessor plan whose assets were transferred to the ESOP) and are 55 years or older. You can diversify up to 25% of the shares in your ESOP account at age 55 and each year thereafter and 50% at age 60. This is cumulative; an employee diversifying 25% at age 55 cannot diversify 50% of the remainder at 60.

What if I Do Not Accumulate 10 Years of Participation Until After I Reach Age 55?

In that case, your right to diversify 25% starts when you accumulate 10 years of participation and continues for another five years, even though you would be older than 60 then. For instance, if you have 10 years in the ESOP as of age 57, you would be able to diversify 25% at age 57, have five more chances to keep up to 25% of whatever shares are in your account diversified until you were 62, and then could have up to 50% diversified.

Getting Money Out of the ESOP Before Leaving the Company

Although an ESOP is mainly designed to provide benefits after leaving employment, there are certain circumstances in which you might receive money before leaving the company:

Diversification: As noted above, one diversification method involves the company paying you directly.

Borrowing: One way to get money out of a retirement plan would be to borrow funds from it and pay them back. But almost no ESOPs allow this (some 401(k) plans do). The reason is that if you borrow money out of your account and the stock value then falls, the company has no collateral to get the money back if you decide not to repay the loan.

In-Service Distributions: A small number of ESOPs and other retirement plans allow for what is called "in-service" distributions where some of the employees’ account balances are paid out periodically while people are still employed, but very few ESOPs do. If a company has such a plan, it has to be offered on the same basis to everyone. It cannot take a request from one individual and honor just that.