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 the ESOP be made the beneficiary of a life insurance policy?

The idea here would be to use the proceeds of a policy to make a contribution to the ESOP in a way that might exceed the annual allocation limits. Arguably, if the ESOP is deemed the beneficiary, the proceeds would not be a contribution and so would avoid the overall contribution limits. The allocation of the benefits to employees, however, would still have to meet annual additions test, so it would probably fail this test. Further, if the ESOP is the beneficiary, the company would probably have to consider the premium payments as a contribution to the ESOP from the time the ESOP was named the beneficiary.

A better approach is either to contribute the proceeds over time of any life insurance policies to the ESOP or to use the funds internally to buy back shares from departing employees. Unlike naming the ESOP the beneficiary, this generates a tax deduction for the company.

Link to this FAQ Topic: Distributions & Repurchase