ESOP

What is an Employee Stock Ownership Plan (ESOP)?

An Employee Stock Ownership Plan (commonly known as ESOP, for short) is categorized as a qualified defined contribution plan and allows employers to provide company stocks to employees. The Internal Revenue Agency (IRS) defines ESOPs as “an IRC section 401(a) qualified defined contribution plan that is a stock bonus plan or a stock bonus/money purchase plan. 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. The IRS and Department of Labor share jurisdiction over some ESOP features”.

Companies who choose to opt for an ESOP, establish a trust fund, and contribute stock or cash to purchase existing company stock. These employee benefit plans are the most popular way for employees to gain an ownership interest in their respective workplaces. 

Stock allocation to an ESOP trust fund varies between companies, however, all employer contributions go directly into individual accounts of employees. These employer contributions are tax-deductible, and likewise, employees are not taxed on the contributions. 

Employees are not fully vested in their respective shares until achieving seniority within the company – the IRS stipulates that workers must be fully vested within 3 to 6 years. Once an employee departs the company, the employer must purchase back the respective allocated company stock.

 

ESOP Rollover Rules & Limitations

The IRS has stringent rollover rules that must be followed if you don’t want to incur hefty tax penalties. As per the guidelines, rollovers are permitted with an Employee Stock Ownership Plan into another qualified plan or IRA.

Funds from an  ESOP can be “rolled over” into another type of retirement account or between financial institutions within a period of 60 days. If you are under 59 ½, failing to do so within the 60-day timeframe from initially receiving the funds, will result in a 10% early-withdrawal penalty tax being levied on said funds. 

It is crucial to note that the specifics pertaining to distribution rules are dependent on the company. Those who have an ESOP are advised to read the “Summary Plan Description” to fully understand the specifics of the respective plan regulations.

 

 ESOP 401(k) Plan vs. Other Retirement Accounts

The table below compares the various types of retirement plans:

Plan TypeSponsorshipRoth Option?Allows Precious Metals Stocks?Allows Precious Metals Bullion?Allows Other Alternative Investments
Precious Metals IRAIndividualYesYesYesYes
Traditional IRAIndividualYesYesNoNo
401(k)EmployerYesMaybeNoNo
SEP IRASelf-employed or Business ownerYesYesMaybeMaybe
Solo 401(k)Self-employedYesYesYesMaybe
Simple IRAEmployerYesYesMaybeMaybe
Money Purchase PlanEmployerNoMaybeNoNo
Profit Sharing PlanEmployerNoMaybeNoNo
457(b)Government or Non-governmental Tax-exempt Employer YesMaybeNoNo
SARSEPEmployerNoYesMaybeMaybe
Keogh PlanSelf-Employed or Unincorporated Employer NoMaybeNoNo
Thrift Savings Plan (TSP)Government or Armed Services EmployerYesNoNoNo
ESOPEmployerYesMaybeNoNo
AnnuityIndividualNoMaybeNoNo

Maybe” denotes where precious metals investment options are dependent upon the retirement vehicle provider.

 

ESOP Pension Plan Limits

The Internal Revenue Agency (IRS) has specific pension limits for an Employee Stock Ownership Plan. For 2020, the IRS stipulates that “the dollar amount for determining the maximum account balance in an employee stock ownership plan (ESOP) subject to a five-year distribution period will increase from $1,130,000 to $1,150,000, while the dollar amount used to determine the lengthening of the five-year distribution period will increase from $225,000 to $230,000”. 

 

ESOP Calculator

An ESOP can prove to be an excellent retirement investment choice because it is a tax-advantaged investment vehicle.  There are numerous components that contribute to the amount of savings you set aside for retirement. Use this ESOP calculator to determine how much you could potentially save.

 

Employee Stock Ownership Plan (ESOP) FAQs

An ESOP allows employers to provide company shares to employees via an employee benefit plan. The IRS defines ESOPs as “an IRC section 401(a) qualified defined contribution plan that is a stock bonus plan or a stock bonus/money purchase plan. 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. The IRS and Department of Labor share jurisdiction over some ESOP features”.

If you have an ESOP with a company that is acquired, typically your stock from your current employer will be transferred over into the new company stock, provided said company also offers an ESOP. If the new company does not offer an ESOP, then the old stock will be cashed out and moved into a 401(k). Conversely, during the acquisition process, the new company may choose to purchase the old company stock from you, giving you a fair market price.

Similar to a 401(k) plan, if you are 59 ½ or over, you can withdraw funds from an Employee Stock Ownership Plan without penalties. However, if you are not yet 59 ½ years old, the IRS will also impose a 10% penalty tax on the withdrawal on top of the normal income taxation.

An ESOP is categorized as a qualified defined contribution plan and allows employers to provide company stock to employees. Companies establish a trust fund, and contribute stock or cash to purchase existing company stock. Stock allocation to an ESOP trust fund varies between companies, however, all employer contributions go directly into individual accounts of employees. These employer contributions are tax-deductible, and likewise, employees are not taxed on the contributions.

Employees are not fully vested in their respective shares until achieving seniority within the company - the IRS stipulates that workers must be fully vested within 3 to 6 years. Once an employee departs the company, the employer must purchase back the respective allocated company stock.

Conversely, a 401(k) is categorized as a “defined contribution plan”, where the employee funds the account with paycheck deductions prior to taxation. Additionally, with some 401(k) plans, the employer will make proportionally matched contributions to the account based on elective deferrals of the employees.

For 2020, the IRS stipulates that “the dollar amount for determining the maximum account balance in an employee stock ownership plan (ESOP) subject to a five-year distribution period will increase from $1,130,000 to $1,150,000, while the dollar amount used to determine the lengthening of the five-year distribution period will increase from $225,000 to $230,000”.

The IRS has stringent rollover rules that must be followed if you don’t want to incur hefty tax penalties. As per the guidelines, rollovers are permitted with an Employee Stock Ownership Plan into another qualified plan or IRA.

Funds from an ESOP can be “rolled over” into another type of retirement account or between financial institutions within a period of 60 days. If you are under 59 ½, failing to do so within the 60-day timeframe from initially receiving the funds, will result in a 10% early-withdrawal penalty tax being levied on said funds.

It is crucial to note that the specifics pertaining to distribution rules are dependent on the company. Those who have an ESOP are advised to read the “Summary Plan Description” to fully understand the specifics of the respective plan regulations.

If you would like to invest in precious metals through your ESOP, you must acquire diversification rights with your company.

The primary benefit of rolling your ESOP distributions into a self-directed IRA like a Precious Metals IRA, is that this type of retirement account permits a myriad of diversified assets not allowed in other retirement vehicles. In addition, a self-directed IRA is solely managed by you the investor. Although under federal law, you must have a custodian who acts as an administrator over this type of retirement vehicle.

In essence, the IRS has imposed little restrictions on what you can hold in a self-directed IRA. Unlike many other retirement accounts, a self-directed IRA can be used to invest in everything from precious metals like gold and silver, to real estate, to commodities. Akin to other IRAs, the only investments not allowed in a self-directed IRA are S corporation stock, collectibles, and insurance investments.

A traditional IRA is an individual account that you can set up on your own. Conversely, an ESOP is categorized as a qualified defined contribution plan and allows employers to provide company stocks to employees.

The Internal Revenue Agency (IRS) has stringent regulations on what types of gold and silver are permitted in an IRA. Essentially, the criteria include the purity levels of the gold or silver, and where it was minted. It is crucial to understand that only specific bullion coins and bars which meet IRA-approved purity levels are permitted in this type of retirement vehicle. Some examples of bullion coins that are approved by the IRS for investing in an IRA include American Eagles, Canadian Maple Leafs, and Austrian Philharmonic.

It is imperative to understand that the IRS does NOT permit things like collectible coins or numismatics as an IRA account. Any reputable IRA company will only recommend IRA-approved gold and silver bullion coins and bars. Be wary of any Gold IRA company that attempts to push collectible coins or numismatics as an investment option for an IRA - their intentions will be dubious.

A Gold IRA company is a firm that acts as a custodian for the entirety of the process for setting up Gold IRAs (in addition to other Precious Metals IRAs). The process entails setting up the account, an IRA rollover or custodian-to-custodian transfer, purchasing IRA-approved precious metals, and storing precious metals in an accredited IRS-approved depository. Usually, Gold IRA companies have established relationships with traditional IRA custodians, IRS-approved accredited depositories, and precious metal dealers, which makes the process seamless for clients.

It is crucial to understand that under federal law if you open a self-directed IRA (including a Precious Metals IRA), you must have a custodian.

This is solely dependent on your personal preferences. What Gold IRA company you choose is contingent on what components are most important to you, whether it is storage options, ratings, or client services, amongst other factors. Once you have decided on your personal preferences, select numerous companies, then contact them to receive more information pertaining to both the respective firm and products offered.

Sometimes any movement of money from one retirement plan to another is often referred to as a “rollover”. However, the IRS has specific definitions for a rollover and a transfer. As per the IRS definition, a rollover occurs when the funds being moved are paid to you directly, and you then deposit the money into the other retirement vehicle.

The IRS has strict regulations and rules pertaining to an IRA Rollover. The guidelines outlined by the IRS for an IRA rollover include having 60 days to deposit the money you have received, in the custodian of your choice. If you are under 59 ½, failing to do so within the 60-day timeframe from initially receiving the funds, will result in a 10% early-withdrawal penalty tax being levied on said funds.

If you receive distributions from a retirement plan and you rollover into another retirement plan, as per the IRS rules there will be no taxation on those funds. In addition, funds can only be rolled over once in a 365-day period from a specific IRA.

In a trustee-to-trustee transfer (as the IRS has deemed it) you request that the original IRA custodian transfers the funds to the new IRA custodian. With a trustee-to-trustee transfer, you never touch the funds and the money transferred is not subject to taxation.

Investing in precious metals such as gold is an excellent hedge to protect your investment portfolio against economic uncertainties and inflation. A diversification strategy that includes gold (or other precious metals) not only protects your portfolio against market turmoil, but gold also provides significant growth potential. A simple method for diversification is to open a self-directed IRA.