An employee stock ownership plan (ESOP) must meet the requirements generally applicable to all tax-qualified defined contribution plans. The additional requirements for a plan to qualify as an ESOP under the Employee Retirement Income Security Act of 1974 (ERISA) and the Code are similar, but not identical. However, the advantages of being characterized as an ESOP are fully available only if the plan meets the requirements of both ERISA and the Code (see Practice Note, Employee Stock Ownership Plans (ESOPs): Qualification Rules).
An ESOP is generally used as a financing vehicle for the plan sponsor.