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 loan money to an employee after termination for the value of their ESOP account before it makes the distribution of the account?

The problem with this solution is that ERISA specifically prohibits the" "alienation or hypothecation" of any participant interest in a retirement plan while it is held in the trust. That is an important safeguard in that it protects participant benefits from creditors, but it also prevents the participant from putting a retirement plan benefit up as collateral on a loan or in any other way compromising his or her rights to it. Participants are simply not legally competent to make such a pledge.

So the problem with the solution is that the loan will be essentially unsecured, and there is no legal way to in any way force repayment by taking the participant's ESOP account balance. If the participant decided not to repay the loan, there is nothing the Company could do but make a full distribution. Anything else would be a violation of ERISA. Of course, the participant might decide to repay the loan, but the company can't take a collateral interest in his account to guarantee that. The participant is not legally authorized to give it, and for the Trustee to do it would be a prohibited transaction (pledging a Trust asset in honor of a corporate obligation).

An unsecured loan (or one secured by some interest in something the participant has available to pledge,like his house or something) payable around the time the ESOP distribution is to occur is a better solution.

Link to this FAQ Topic: Distributions & Repurchase