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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What are the options for distributions of an ESOP account in shares?

Stock distributions can be made in a lump sum or in installments. Non-lump sum distributions are subject to income tax and a 10% penalty if received before death, retirement at or after age 55, age 59 1/2, or disability. If the payments are in installments, the company must buy back the shares at the employee's option within 30 days of their distribution. If the stock is distributed in a lump sum, and the company is not public, the repurchase can be paid for immediately in cash or over up to five years with adequate security and interest. The security must be some real asset, not the company stock.

Many plans are written to delay distributions as long as possible. This is not necessarily a good idea if your stock price is going up faster than your cost of money. You may also not want former employees to continue to participate in the ESOP, either for philosophical reasons or because you would like to get their shares back to be reallocated to active employees. It is easy to change your rules to provide for faster payout; changing to a slower payout must be done more cautiously, generally by just applying it to unvested shares.

Changing the form of distribution (stock or cash) is also something the company can do at any point, although it is important to communicate this change and the rationale in advance to help mitigate employee dissatisfaction if the change is seen as financially harmful, such as when the company stock price has been rising.

For a detailed discussion of the issue concerning distribution and how it affects repurchase obligation, see The ESOP Repurchase Obligation Handbook and Creating a Sustainable ESOP Distribution Policy.

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Link to this FAQ Topic: Distributions & Repurchase