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What's an ESOP? A plain-English guide for everyone
Most corporate ownership structures reward those at the top. Employee Stock Ownership Plans (ESOPs) were created by Congress in 1974 and provide incentives to extend ownership opportunities throughout a company, allowing workers to share in the wealth they help create. An ESOP is a retirement plan that gives you shares in the company you work for. You don’t buy them. You earn them by doing your job.
Most Americans have little to nothing saved for retirement. But the median ESOP account holder has $80,500 put away for retirement, without contributing a penny of their own money (NCEO, 2023). This page covers how ESOPs build worker wealth and stronger companies.
How an ESOP works
01
Company sets up trust for employees
The company places stock in a trust for workers. Workers typically pay nothing — not a dollar out of pocket — and ESOP contributions are almost never intended to replace any wages or benefits workers would otherwise receive.
02
Workers share in the company’s success
Companies typically make annual contributions to the ESOP. Shares in the ESOP are allocated to employees. The better the stock does, and the more shares you get, the more wealth you build.
03
You cash out when you retire
Companies buy back your shares when you retire.
Common questions
Do I have to buy the stock?–
No. Shares are contributed to your account by the company. An ESOP typically costs employees nothing and is not intended to replace wages or benefits.
Is my money at risk if the company struggles?+
Your account value is tied to company performance. Most ESOP companies also offer and match workers’ contributions to a diversified retirement plan like a 401(k).
What does it mean to be an owner? Do I have a say in all company decisions?+
Not necessarily. Employee ownership doesn’t mean every employee makes management decisions. Your day-to-day roles and responsibilities generally remain the same. Existing hierarchies and leadership structures typically stay in place. Many successful ESOP companies encourage worker voice through committees, financial transparency and more, but this is not required.
Who decides what the company is worth?+
For a privately held ESOP company, an independent appraiser generally performs an annual valuation, and the ESOP trustee determines the share value based on that process.
How can I make the ESOP more valuable?+
The share value is influenced by the company’s overall performance. Employees can contribute by doing great work, serving customers well, improving efficiency, and helping the business succeed.
What’s the difference between an ESOP and a 401(k)?+
Both help build wealth for retirement, but an ESOP primarily holds the stock of your employer, while a 401(k) generally allows employees to contribute their own money and choose among diversified investment options. Many ESOP companies offer both.
What’s an example of an ESOP I might have heard of?+
The supermarket chains Publix and WinCo Foods, Wawa convenience stores and King Arthur Baking are well-known ESOP companies.
I own my company. How do I know if I can put an ESOP in?+
ESOPs typically work for profitable companies with stable cash flow, a solid management team, and a workforce large enough to support the expenses of running an ESOP. The National Center for Employee Ownership and the Employee Ownership Expansion Network are great places to start.
Why do owners choose an ESOP?+
Owners often adopt an ESOP because it provides them with liquidity while helping preserve the company’s legacy, culture, jobs, and independence. There can also be meaningful tax benefits.
Do I have to sell my whole company?+
No. An ESOP can purchase a portion of the company or 100%. Some owners also start with a portion of the company and gradually move to 100% over time.
Glossary
ESOP
A qualified retirement plan under ERISA that owns shares in its sponsoring company.
Broad-based employee ownership
A form of shared ownership, including ESOPs, where every worker in a company — not just top executives — has the opportunity to share in the wealth they help create.
Louis Kelso
The lawyer and investor whose idea ESOPs were. Congress agreed with him, and wrote the first ESOP laws into ERISA in 1974.
S-Corp ESOP
A highly effective and tax-efficient ESOP form, particularly for 100% ESOP owned companies.
C-Corp ESOP
A form of shared ownership where an ESOP typically owns some, but not all, of the stock of a C-corporation. Tax benefits are more limited than in a 100% S-Corp ESOP.
Vesting
Vesting refers to how much of your ESOP benefit you have earned the right to keep. Typically, employees become more vested the longer they work at the company.
Trustee
The fiduciary who holds the shares and must act in employees’ interest.
Valuation
The annual independent appraisal that sets what a share is worth.
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The short answer
An ESOP is a retirement plan funded with company stock, typically at no cost to you. If the stock goes up, your account grows. You usually cash out when you retire.