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)

We have a partial S Corporation ESOP. Can we gross up the pay of non-ESOP owners so we do not have to make a pro rata distribution to the ESOP?

This seems like a sensible idea. In many cases, keeping the money in the company for growth is better for employees in the long run. It is, however, probably not allowable. First, the IRS would view this as a disguised distribution, and because the ESOP did not get its share, a violation of S corporation rules. Second, the IRS could say this means the CEO has, effectively, a second class of stock and that too would violate the S election. Finally, even though a case can be made this is good for employees, a fiduciary may have a hard time justifying the tradeoff of a certain distribution now for uncertain future growth.

Link to this FAQ Topic: S Corporation ESOPs