Stock Bonus Plans & ESOPs
Stock bonus plans are similar to profit sharing plans in that they are non-pension plans under which benefits are distributable in employer stock. Most stock bonus plans provide for a discretionary contribution formula and may adopt various allocation formulas. Stock bonus plans may, but are not required to, invest in employer stock.
ESOPs (Employee Stock Ownership Plans) may be a stock bonus plan, or a stock bonus plan and money purchase plan. The ESOP must be designed to invest primarily in employer securities. The contribution and allocation formulas under an ESOP normally operate under the same rules as profit sharing plans.
Only employers that issue stock may establish these types of plans. The plans are very specialized types of arrangements that should be established with specific objectives in mind. Som employers believe that by envesting the plan in employer stock, employees will take a more active role in the business and have more loyalty to the company.Advantages
- Provides a ready market for shareholders to sell their stock
- Possible lower purchase price of stock due to selling shareholder's deferral of gain
- Less expensive than conventional debt-financing
- Employer may receive a deduction for dividends paid to the ESOP
- Assists in recruiting and maintaining employees
- Increases employee morale and productivity
Last Updated: 9/23/2012 10:05:00 PM
- Participation cannot be restricted to executives
- Additional cash contributions may be needed to make cash distributions or to comply with an employee's exercise of a put option
- Certain voting rights must be granted to employees
- An annual appraisal expense is incurred if stock is not publicly traded
- Expensive to maintain