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)

Under what circumstances is the company permitted to distribute account balances under $7,001 to terminated employees earlier than five years following termination?

Many ESOPs are written to allow companies flexibility in the timing of distributions of small account balances. Some companies with plans that do not offer this flexibility are choosing to amend their plans. For plans that do allow such flexibility, the ESOP administration committee (or parallel body) can make distributions earlier than the five years provided that (a) there is a written distribution policy, (b) the acceleration is not done in a way that discriminates in favor of highly compensated employees, and (c) the acceleration does not favor one class of employees over another.

The rules vary depending on the size of the account balance to be distributed. For accounts under $1,001, the company can distribute in cash without obtaining the beneficiary's consent. For amounts greater than $1,000 but under $7,001, the company is required to roll the distribution into an IRA, unless the participant elects otherwise.

Given all this, most plan sponsors choose among three options:

1. Automatically distribute all amounts under $7,001 without obtaining participant consent

2. Require participant consent for all distributions (even those under $7,001)

3. Require consent for distributions over $1,000 and under $7,001; distribute amounts under $1,001 without obtaining consent.

Link to this FAQ Topic: Distributions & Repurchase