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 I use the ESOP for safe harbor matching contributions to a 401(k) plan?

You can designate any portion of ESOP company contributions for this purpose. ESOPs can be the company contribution in any of the formulas described below:

Under a safe harbor plan, companies can match each eligible employee's contribution, dollar for dollar, up to 3% of the employee's compensation, and 50 cents on the dollar for the employee's contribution that exceeds 3%, but not 5%, of the employee's compensation. Alternatively, you can make a nonelective contribution equal to 3% of compensation to each eligible employee's account. Each year you must make either the matching contributions or the nonelective contributions. The plan document will specify which contributions will be made and this information must be provided to employees before the beginning of each year.

The automatic enrollment provisions for 401(k) plans in the Pension Protection Act provides that companies can meet the 401(k) testing rules in a different way. Employer contributions must vest 100% after two years in these plans. The plans have a minimum automatic deferral (employees can opt out but otherwise are in), with annual increases capped at 6% of compensation. Employer contributions can be made by:

* Non-Elective contribution of 3% of compensation to all eligible participants in the plan;

* A basic matching contribution of 100% of the first 1% of compensation deferred plus 50%

match on the next 5% of compensation deferred; or

* An enhanced matching contribution at least equal to the basic formula.

For more information, See Understanding ESOPs.

Link to this FAQ Topic: ESOP Plan Design & Participation