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.

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Can a company vary its contributions levels to each employee based on how much they receive in distributions or dividends?

It is possible, but you still must meet anti-discrimination test rules. This strategy makes the most sense in a company that is paying significant dividends or distributions on a regular basis, such as a less than 100%-ESOP owned S corporation or an ESOP company making substantial dividend payments to help repay a loan. In these cases, employees with a lot of shares will get a much larger annual addition than employees with relatively few shares, even if they are at similar salary levels.

In these situations, a company might want to set some target percentage of pay that would be provided from all annual additions, both contributions and distributions or dividends. For instance, say the company targets 10% of annual pay. It has shares in a suspense account as well as shares that have been allocated. Annual distributions or dividends paid on allocated shares must be allocated based on relative share balance. If that equals 10% or more, the employee gets no additional allocations of shares from the suspense account and no annual contributions. If it is less, and the allocations from the suspense account bring the employee to 10%, then the employee gets no annual contribution from the company to the ESOP. If it is still less than 10% after all share allocations, then the employee gets a contribution to make up the difference. Contributions can be made in cash, which may be used then to buy available shares in the plan, or stock. Either way, newer employees get shares so they also can start getting distributions. Companies using this policy generally should release shares from the suspense account based on an allocation formula that is non-discriminatory and not based on share balance (such as relative pay).

Companies doing this must run an annual anti-discrimination test to determine if the impact of this policy is to favor any highly compensated employee (this is a legally defined term, $160,000 in 2026). If any such employee gets an excess as a result of any contributions (as opposed to allocations from dividends or distributions), contributions would need to be reduced.

There could be many variations on this approach, but the key idea is to limit the impact of distributions or dividends on the "have/have not" problem by reducing annual contributions for people who have large numbers of shares. Because this does not fall within the safe harbor rules for ESOP allocations, it is critical to work with counsel and plan administrators on the design of this approach.

Link to this FAQ Topic: ESOP Plan Design & Participation