An employee stock ownership plan (ESOP) is a retirement plan in which an employer contributes its stock to the plan for the benefit of the company’s employees.
Employer allocates certain percentage of company’s stock shares to eligible employee at no upfront cost. Distribution of shares based on the employee’s pay scale or terms of service.
Employee stock ownership plans are issued as direct stock, profit-sharing plans or bonuses, and the employer has the sole discretion in deciding who could avail of these options.
Every employee is eligible for employee stock ownership plan, except the directors and promoters of a company with more than 10% company's equity.
An ESOP must be designed to invest primarily in qualifying employer securities as defined by IRC section 4975(e)(8) and meet certain requirements of the Code and regulations.
Distributions are rarely permitted to people under 59½ or 55 if terminated and, if they are allowed, they could be subject to a 10% early withdrawal penalty.
Employees do not pay tax on the contributions to ESOP. Employees are only taxed when they receive a distribution from ESOP after retirement or when they exit the company.