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)

What is the employees tax liability for ESOP distributions?

If the employee puts the money into an IRA or the distribution is rolled forward into another qualified plan in another company (this would be unusual except in the case where an ESOP company is purchased by another company), there is none until the money is withdrawn, when the withdrawal is taxed as ordinary income. Otherwise, the employee must pay ordinary income tax on the value of company contributions to the plan, capital gains taxes on the appreciation in share value when sold (this only applies to lump-sum distributions), and a 10% penalty if the distribution is not after age 59 1/2 or for death, termination after age 55, or disability. For capital gains holding period requirement purposes, the time the shares have been in the employee's account do count.

The rollover to an IRA or another qualified plan is normally done as a direct rollover, meaning the employee notifies the company that the allocation should be rolled over into the successor plan before the allocation is paid out. Alternatively, the amount can be paid out to the employee who then has 60 days to roll it into an IRA. Withholding plan rules apply if this choice is made.

Link to this FAQ Topic: Distributions & Repurchase