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 should distributions be allocated in an S ESOP?

For distributions not used to repay a loan, they must be allocated on the basis of relative share allocations. When a company uses distributions to repay an ESOP loan, for allocated shares, the participant must receive shares equal in value to the distributions attributable to those shares. For unallocated shares, as long as the allocation formula is nondiscriminatory, the portion of the loan paid with distributions could be allocated on the basis of relative allocations, the company's formula for making contributions to the plan, or another non-discriminatory formula. Using the release formula used for normal contributions for suspense account shares will result in newer employees getting more shares than if only allocated shares are used, but eventually the loan will be repaid, and this opportunity will pass. One issue with making distributions based on allocated shares is that more senior people with larger account balances (and, in many plans, inactive employees still in the plan) will accumulate increasingly large account balances while newer employees will have a hard time catching up. Companies may want to consider plan designs that provide that inactive employees do not continue to hold shares in the plan and that additional allocations are made to newer employees. These plan design issues raise legal issues that must be discussed case-by-case with counsel.

For details on S corporation ESOPs, see S Corporation ESOPs.

Link to this FAQ Topic: S Corporation ESOPs