Understanding ESOP Plan Provisions
ESOP. A qualified Defined Contribution, employee retirement plan, for the exclusive benefit of plan participants/beneficiaries. To learn more about the basics of ESOP’s check out our previous post here. Once you have some insight on the basics of an ESOP it’s time to gain an understanding on more of the details, ESOP plan provisions.
Distribution Timing
- Retirement, disability, or death – as soon as administratively possible
- Other termination usually delayed 5 years unless small vested balance
- C corporation can also delay until loan is fully paid.
Distribution Options
- Typically substantially equal installments over 5 years
- Lump sum for smaller balances
- Stock distributions with a “put” or “call” option
Diversification Rights
- Closely-held corporations
- Must be offered to anyone who is age 55 and has at least 10 years of ESOP participation
- In first five years, must be able to diversify up to 25% of all shares ever allocated to the participant; sixth year can diversify up to 50%
- Options – transfer to 401(k) plan, permit cash distribution, and/or offer at least 3 other investment options within the ESOP
- Have 3 months after year-end to make the election, with payment in 6 months
- Publicly-traded corporations – only requirement is 3 years of service
