Why Increasing Your ESOP Contribution Level Might Actually Save You Money in the Long Run

It is common in mature ESOP companies, especially those whose stock has been performing well, to try to create a steady and sustainable contribution level to the ESOP trust. Intuitively, the argument for doing this seems obvious. If the contribution level is too high, it seems that it would make funding the plan over time much less affordable. While that can be true in some situations, a recent presentation at the NCEO’s Forum, “Busting the Benefit Level Myth: What Too High Really Means for Your ESOP,” made a convincing case that sometimes a higher contribution level may result in a lower long-term cost for maintaining the ESOP.

The typical mechanism for creating a steady contribution level would be for the company to repurchase (redeem) shares from departed employees. The shares would then be recontributed by the company as needed to meet the target benefit level. For instance, say that a company's target benefit level is $1 million to be contributed to the ESOP in 2027. The company, however, needs to buy back $2 million from departed employees. So the company buys back the $2 million in shares, contributes $1 million in shares back to the ESOP, and retains the remaining shares in treasury. In a future year, the company may have a situation where less than $1 million is repurchased. In that case, it can take some of the retained shares and recontribute them along with those that were repurchased to equal the $1 million target.

Tina Langlois and Ashleigh Newlin of Chartwell and Jennie Msall of Ventura Trust made a compelling argument that if you have a significant number of former participants and/or senior employees with large accounts nearing the time they will leave, it can actually cost more not to contribute more of those shares to the ESOP now. If you do not, the shares that are held at the company level will not count as outstanding, meaning the remaining shares the company will soon have to purchase will go up in value significantly.

Click here for a detailed look at the argument.