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)

The law says that if the ESOP ownership drops below 30% within three years after a 1042 sale because of a sale or disposition of the ESOP shares, then there is a 10% excise tax on the proceeds of that sale or disposition. Are there any exceptions to this?

Yes. If the ESOP ownership drops below 30% because the company reacquires shares from departing ESOP participants or if the company is sold in a "Section 368" sale (a tax free exchange of the stock in one company for the stock of another), then the tax does not apply. Note that the tax also does not apply if the ESOP ownership drops below 30% because of dilution of the shares by the issuance of new stock. It would apply, however, if someone bought shares back from the ESOP directly.

For more details, see Selling to an ESOP and Financing the Deal and the ESOP Pre-Feasibility Toolkit.

Link to this FAQ Topic: Tax Benefits to the Seller & Company