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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Is there a way to contribute more than 25% of pay in a leveraged ESOP to repay a loan?

In C corporations, reasonable dividends paid on ESOP shares acquired with the loan proceeds generally can be used to repay the loan and are not included in the 25% calculation. In a 2004 private letter ruling, the IRS concluded that this 25% of pay limit is, for an ESOP in a C corporation, in addition to contributions by the company to other qualified plans. If a company maintains another defined contribution plan, the contribution limits for each plan count separately, so, for instance, a company could contribute up to 50% of pay. This only applies to leveraged C corporation ESOPs, however. S corporations can also use distributions of earnings to pay loans, and these distributions are not counted towards the 415 limits.

Link to this FAQ Topic: Financing an ESOP