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Employee Stock Ownership Plan (ESOP)
Practical Law Glossary Item 9-502-8099 (Approx. 3 pages)
Glossary
Employee Stock Ownership Plan (ESOP)
A stock bonus plan, or a stock bonus plan combined with a money purchase plan, that:
- Is designed to invest primarily in "qualifying employer securities" under ERISA Section 407(d)(5) (29 U.S.C. § 1107(d)(5)) and Internal Revenue Code (Code) Sections 409(l) and 4975(e)(8) (see Practice Note, Employee Stock Ownership Plans (ESOPs): Qualifying Employer Securities).
- Satisfies other specific requirements set out in ERISA and the Code, including the tax-qualification requirements of IRC Section 401(a) (see Practice Note, Requirements for Qualified Retirement Plans).
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.
For more information on ESOPs, see Practice Note, Employee Stock Ownership Plans (ESOPs).