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 plan require that employees in an S corporation receive cash when they get their distributions of shares from their ESOP accounts?

Plans must allow the employees to get a distribution in stock, but in an S corporation they can subject this to an immediate right to purchase the shares back. S corporations also could require that if employees wanted to make a direct rollover of the distribution into another qualified plan, they accept a cash distribution (so as not to jeopardize the S election). This is permissible as long as the employee also has the choice to get a stock distribution that would have to be immediately resold to the company. Many employers purchase the shares just before an employee terminates, and then makes distributions from the cash account (which is prudently invested) on the normal distribution schedule, a process called account segregation.

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

Link to this FAQ Topic: S Corporation ESOPs