Employee Stock Ownership Plan

An Employee Stock Ownership Plan (ESOP) in the United States is a defined contribution plan, a form of retirement plan as defined by 4975(e)(7)of IRS codes, which became a qualified retirement plan in 1974.^[1][2] It is one of the methods of employee participation in corporate ownership.

According to an analysis of data provided by the United States Department of Labor, there are approximately 6,237 companies in America with an ESOP.^[3] Notable U.S. employee-owned corporations include the 250,000^[4] employee supermarket chain Publix Supermarkets, Hy-Vee, McCarthy Building Company, WinCo Foods, environmental consulting firm Citadel Environmental Services, Inc., and Harpoon Brewery. Today, most private U.S. companies that are operating as ESOPs are structured as S corporations ESOPs (S ESOPs).

According to The ESOP Association, a national trade association based in Washington, DC, the most common reason for establishing an ESOP is to buy stock from the owners of a closely held company. Many closely held companies have little or no succession plan in place. As a result, the day a founder or primary shareholder leaves the business often results in significant adverse consequences for the company, the employees, and the exiting owner. ESOPs offer transitional flexibility that can facilitate succession planning. Founders and main shareholders can sell to ESOPs all of their shares at one time, or percentages of their shares on the schedule of their choosing. The transition in leadership, therefore, can occur as quickly or slowly as the owner wishes.^[5]