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)

When a company with an ESOP is bought by another company, what happens to the employee accounts? When do they get paid out?

There are two possible scenarios. First, the acquiring company may roll the plan assets into its own defined contribution plans, in which case they would be paid out under the terms of the new plan when employees leave the new employer. Second, and more commonly, the ESOP may be terminated. In that case, the acquirer usually files for a letter of determination from the IRS to terminate the plan. That may take a year or more to process. The acquiring company then usually says it will pay people as "as soon a practicable." This should not take more than one year, but as long as the acquirer can show it is acting in good faith, there is no specific time limit.

There are a number of specific issues that should be addressed in this transaction. If there are shares in the suspense account, they are usually sold as part of the transaction. The remaining balance on the ESOP loan is paid and if there are excess proceeds, they will be allocated. The plan document may need to be amended to say how this will happen. Generally best practice is to allocate based on the usual allocation formula, such as relative eligible pay. If the allocation is based on relative share balance, check with advisors to make sure that that the allocation cannot be considered something other than earnings on stock balances and thus be subject to annual contribution limits (generally, this will not be a problem). If the stock held in suspense is worth less the the debt, the shares are usually cancelled.

Often, the buyer will want to include some kind of escrow and/or earn-out that can extend the payout. Trustees need to assess the fairness of such proposals. If either apply, the ESOP may be maintained until the final payments are made. Alternatively, Private Letter Ruling 200420036 allows the ESOP to be terminated and employees to receive a scrip payment for their proportional interest in the escrow.

Link to this FAQ Topic: Distributions & Repurchase