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 seller forgives all or part of an ESOP note, what happens to the allocation of shares?

This is not a settled issue. One scenario is that the seller has already forgiven the entire repayment. In that case, it appears the plan would not have the option to do anything but release all the rest of the shares. The shares would either have to be released based on account balances or on the normal contribution formula. It also appears that even the normal contribution formula would not raise a Section 415 excessive contribution problem, although the IRS conceivably might challenge that, even if it would have a hard time succeeding.

A better approach would be to structure the forgiveness as a year-to-year process, with shares released each year according to the normal contribution formula.

Link to this FAQ Topic: Financing an ESOP