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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How does stock get released from an ESOP suspense account for allocations to participants?

Each year, as the loan is repaid, a percentage of shares held in the ESOP trust equal to the percentage of the loan that has been repaid that year is released from what is called "the ESOP suspense account." The shares are then allocated to employee participant accounts (for allocation formulas, see the questions on allocation in this section).

The company can use one of two formulas, the "principal only" method or the "principal and interest method." The principal only method releases the percentage of the shares that is equal to the percentage of the total principal paid. This method cannot be used unless the payments of principal and interest on the loan are no less rapid than level annual payments of principal and interest over a 10 year loan, using standard amortization tables to determine allowable interest rates.

The principal and interest method releases shares based on a formula. The number of shares held in the suspense account just before the release is multiplied by a fraction, the numerator of which is the principal and interest payments for the year and the denominator of which is the principal and interest payments remaining on the loan, including the current year. In other words, shares are allocated based on the total amount of the remaining loan (principal and interest) paid that year. The number of years on the loan must be fixed, not variable, renewal or extensions of the loan cannot be considered, and the interest rate is the rate that applies at the end of the year involved.

Link to this FAQ Topic: ESOP Plan Design & Participation