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 reports must be filed with participants?

As with all qualified plans, the plan administrator of an ESOP must provide certain information to participants.

When a plan is first adopted, participants must be notified before the end of the first plan year that a new plan is in place. There are no specific guidelines as to the content of this notice.

On an ongoing basis, the most basic disclosure requirement is to provide a statement of benefit to participants. The statement must include at least a statement of the participant's accrued benefit (account balances in a defined contribution plan such as an ESOP), a statement of vested benefits and/or a statement of when benefits will become vested, and a description of the information used to compute benefit accruals. The distribution of annual benefit statements is now required for individual account plans where participants are not granted self-direction powers with respect to their accounts (such as a non-contributory ESOP). Quarterly statements are required where a participant is given self-direction powers under a defined contribution plan.

The administrator must furnish a summary annual report (SAR) each year to all participants or beneficiaries receiving benefits under the plan. The SAR is a very abbreviated summary of the activity of the plan and must be presented in a form provided by the Department of Labor Regulations.

The administrator must also furnish a summary plan description (SPD) within 90 days of the date a person becomes an ESOP participant or beneficiary receiving benefits under the plan or, if later, within 120 days of the date the plan first become subject to Title I of ERISA (generally the date the IRS first issues a favorable determination letter related to the plan). The required contents of the SPD are detailed in DOL regulations. The SPD must be revised and issued every five years if there have been material amendments to the plan or every 10 years in any case. Whenever a material amendment is made to the plan, a Summary of Material Modification (SMM) must be provided to all participants no later than 210 days following the end of the year in which the modification became effective.

When distributions are to be made from the plan, there are several disclosure and communication responsibilities. The administrator must provide qualifying terminated participants with an opportunity to direct "eligible rollover distributions" to be transferred directly to a successor qualified plan or Individual Retirement Account (IRA). Where the distribution exceeds $5,000 in value (or a lower amount if that is specified in the plan document), the administrator must notify the terminated participants of their right to defer distribution until normal retirement age.

Generally, where a terminated participant is eligible for a distribution of benefits from an ESOP, the administrator must give the participant the right to receive benefits distributed in the form of company stock and must notify him or her of restrictions on transfer and the right to require the company to repurchase the shares. It must also indicate what benefits are available if the employee dies before a certain date. A discussion of the tax treatment of the distribution must be included as well. In the case of an S corporation or a bank in which the plan provides distributions in cash, or where the by-laws of the C corporation restrict ownership of all or substantially all of the stock of the company to the current employees or an ERISA trust, this requirement may be avoided.

The Pension Protection Act also requires certain items to be included on the benefit statements, including an identification of the U.S. Department of Labor's Web site so that participants can seek guidance on the legal standard for vesting and diversification. The Act further permits the distribution of the mandated statements to be in electronic forms as well as written forms. This option may allow plan administrators to save both printing and mailing costs.

Where an ESOP has been in existence for 10 years or more, the administrator will also have a responsibility to notify participants about their right to diversify a portion of their account balances (generally 25% of their company stock account over an initial five-year period, increasing to 50% of the stock account balance by the sixth year) by either receiving an in-service distribution or directing the investment in other investments within the trust if the ESOP offers diversification internally. Where employees can direct their investments pursuant to diversification, they must receive a quarterly notice advising them of the benefits of diversification strategies in their portfolios.

If the ESOP is part of a money purchase benefit plan, additional information must be disclosed concerning annuities, spousal consent and death benefits.

Finally, information about the receipt of a qualified domestic relations order must be sent, along with applicable procedures and whether the order is qualified.

Link to this FAQ Topic: Governance, Fiduciaries & Compliance