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 counts as "eligible compensation" or "eligible pay" in figuring the amount of payroll that qualifies for ESOP contributions?

Pay over a defined limit does not count as eligible pay. The 2026 limit is $360,000, indexed annually for inflation. Employee deferrals into a 401(k) plan do not reduce eligible pay and do not count as employer contributions. Companies can define compensation more narrowly, such as straight pay, but not commissions, as long as this does not have the effect of discriminating against lower paid employees. Eligible pay also excludes anyone who is not in the ESOP because of the "1042" rules (the section of the law that allows seller to defer tax on the sale of stock to an ESOP) that limit the participation in the plan of sellers, their children, parents, siblings and spouses, as well as any 25% shareholders, in receiving ESOP allocations when the seller takes a tax deferral on sales to an ESOP.

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

Link to this FAQ Topic: ESOP Plan Design & Participation