Frequently Asked Questions

Employee Ownership FAQs

Common questions about employee stock ownership plans (ESOPs), employee ownership trusts (EOTs), and other forms of employee ownership, from the basics to technical topics.

This FAQ is written primarily for business owners, managers, and advisors involved in setting up or running an employee ownership plan. If you're an employee at an ESOP company looking to understand your own benefits and rights, see our articles on Working at an ESOP Company and The Rights of ESOP Participants.

NCEO employee ownership FAQ hero (keyboard)

Can a company avoid the Section 409(p) S ESOP anti-abuse rules by moving excess assets in an account into another plan or buying shares in the account and transferring them to cash in the same account?

Section 409(p) was created to prevent people who own too much direct or synthetic equity in an S ESOP from getting shares in the ESOP as well. The rules are complicated, but includes anyone who is deemed to own 10% or more of the shares through the ESOP, individual ownership, or synthetic equity if 50% or more of the total actual and synthetic equity is owned by people who meet this 10% threshold. These individuals cannot get an allocation in the ESOP. If they do, the plan is disqualified. A transfer to a profit sharing plan or other non-ESOP plan can be used to avoid the anti-abuse rules. The non-ESOP plan is required to pay tax on any unrelated business taxable income attributable to the shares transferred. Shares could also be purchased and translated into cash in the ESOP account, but under temporary rules issued in 2005, that purchase would be considered an allocation and could fall under the non-allocation year rules, even though this seems like an illogical result.

For details on S corporation ESOPs, see S Corporation ESOPs.

Link to this FAQ Topic: S Corporation ESOPs