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)

If a company has insurance on its key people, can it have the ESOP own this insurance?

It may seem attractive to have the ESOP buy key person life insurance. The proceeds of these policies can be used to buy back stock from highly paid people if they die, and the company could use pretax dollars to fund the plans. Plans could also be structured to build up value to be used to buy back shares from these key people even if they do not die. Despite these potential advantages, however, it is not a good idea for the ESOP to own the insurance.

First, the ESOP trustee must make decisions about the investment quality of any investments the trust makes. The DOL has generally taken the position that cash value life insurance is not a good investment relative to other investments without an insurance feature. While it is true that the insurance feature makes it possible to buy back shares of key people, this is the obligation of the company, not the ESOP trust. The trustee must make investment decisions based on what serves the "exclusive benefit" of plan participants as shareholders, not what benefits the company. Second, if a beneficiary does die, the ESOP trustee must decide to buy back the shares. The trustee could decide not to do so if the timing or price seems inappropriate. So the company could end up having to repurchase the shares, or it could direct the trustee to buy them, but run the risk of a lawsuit.

Link to this FAQ Topic: Distributions & Repurchase