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 will S corporation distributions be allocated in an S corporation ESOP?

Distributions paid on unallocated shares and used to repay an ESOP loan can be allocated to employee accounts based on the company's contribution formula or on the basis of relative account balances. Distributions paid on allocated shares normally are based on relative account balances. 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