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 you amend an ESOP to become a KSOP and include a Roth deferral feature?

IRS Revenue Rule 2013-74 indicates that a company with an ESOP that has a 401(k) feature can offer participants the opportunity to convert their plan assets to a Roth IRA while still in service. The funds would be taxed as ordinary income to the participant, although some attorneys argue that the net unrealized appreciation should be taxed as a capital gains. Informally, the IRS has said that it does not agree with this view. If the employee waits five or more to start taking a distribution from the Roth IRA, there is no tax paid on those distributions.

This approach can be attractive to some higher income individuals who will face high tax rates on IRA distributions after retirement or in situations where there has been a sharp drop in value (such as in a second-stage ESOP) that is anticipated to be temporary or where a strategic buyer is likely to offer a very large premium. The participant could then pay tax on the smaller amount at conversion and no tax at distribution. Of course, the risk is that the stock will not rise in value sufficiently in either scenario.

Link to this FAQ Topic: Distributions & Repurchase