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 limits for the deductibility of contributions to ESOPs?

There are two limits to consider: the amount the company can contribute to the plan overall ("contribution limits") and the maximum annual addition to any one employee's account ("annual addition limits"). As long as contributions fall within these two limits, those contributions are fully deductible. The limits here are as of 2026 and are adjusted annually.

Annual Addition Limits

The annual addition limit refers to the size of the annual contribution to the ESOP trust. The maximum value a participant can receive in one year as an annual addition to his account is 100% of eligible pay or $72,000, whichever is less. This is a combined limit for the ESOP and any other employer and employee contributions to a defined contribution plan, such as a 401(k).

In a leveraged ESOP, the limit calculation normally does not use the current value of the assets added to the account. Instead, the limit applies to the value of the assets at the time they were purchased using the loan. That is normally equal to the dollar contribution to the trust to repay principal on the ESOP loan. In other words, if the company's stock value is rising, the current value of the addition to a participant's account may exceed the annual addition limits above as long as the value of that addition calculated using the share price at the time of the transaction is under the limits. The IRS does also allow companies to use the current value of the shares released, though in practice they would only wish to do this if the share value is lower than the value at the time of the transaction. Companies must choose to use the method in advance and use it on a consistent basis.

Contribution Limits

In a non-leveraged ESOP the company simply makes contributions of cash or stock to the plan. These contributions are limited to a maximum equal to 25% of the eligible pay of ESOP participants. Eligible pay is all of the pay for participants in the ESOP. Eligible pay excludes pay for any individuals over $360,000 (in 2026). Some companies put a lower cap on eligible pay to flatten allocations. In that case, this lower amount would apply. This limit applies to both C and S corporations. If the company has other defined contribution plans, company (but not employee) contributions to these plans will reduce this limit dollar for dollar.

For leveraged ESOPs the limit on company contributions depends on whether the company is a C or S corporation. In C corporations, the total company contribution limit is 25% of eligible pay to repay the principal each year. This limit is not reduced by contributions to other defined contribution plans. Interest payments and reallocated forfeitures do not count in any of the C corporation limitation calculations. Reasonable dividends on stock held in the ESOP are also deductible. "Reasonable" has not been specifically defined, but should not be much in excess of what similar companies might pay on similar earnings.

S corporation rules are more limiting. Interest payments and forfeitures do count towards the 25% of pay limitation. Distributions on shares can be used to go above the limits, but, as noted, are not tax deductible. Contributions to other defined contribution plans do reduce the maximum company contribution to the ESOP.

In practice, the annual contribution limits are not a feasibility issue except in the most unusual circumstances. In an ESOP, there is an internal loan between the company and the trust that can be paid off much more slowly than the external loan between the company and the lender (a bank or sellers taking a note). The internal loan is essentially an accounting mechanism to determine how quickly shares are released and how much the company contributes to the plan annually. By extending the term of the inside loan, the company can stay within contribution limits.

Where this can be an issue is if the company has people who want to put a lot of money into a 401(k) plan. If the ESOP is making very high annual contributions, there may be limited room for these deferrals. That is because the maximum annual addition to a 401(k) plan and an ESOP combined is $72,000 or 100% of pay, whichever is smaller.

For a detailed description of the rules and uses for ESOPs, see Understanding ESOPs.

Link to this FAQ Topic: ESOP Plan Design & Participation