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Given the uncertainty of future tax rules, limited marketability of a closely held business, and the growing number of business owners approaching retirement age, now is the time to understand how ESOPs (Employee Stock Ownership Plans) work. Come learn about the current ESOP environment from two panelists who serve hundreds of ESOP companies nationwide.
I. Succesion Planning Options
II. ESOP Overview
A. What is an ESOP?
B. Why ESOP?
C. ESOP Tax Incentives and Mechanics
D. How to implement an ESOP
III. Advanced ESOP Concepts (Optional Presentation at a future meeting)
A. Plan Design
D. Living with an ESOP
E. Current Transaction Environment
Employee Stock Ownership Plan (ESOP) Basics
1. Company makes decision to establish ESOP (creates plan and trust documents) and names an ESOP trustee (usually senior management employee(s) who are not selling shareholders). Alternatively, Company may appoint an outside trustee (could be institution like a bank).
2. Independent appraiser determines share FMV and ESOP purchases stock from selling shareholder(s) at price no greater than this FMV -- either with cash borrowed from a bank or the Company, or by credit extended by selling shareholder(s) in return for a note (i.e., leveraged transaction). Alternatively, Company may buy stock from the shareholder(s) and contribute stock directly to the ESOP (i.e., non-leveraged), usually with small percentages of stock.
3. If following the sale directly to the ESOP by the selling shareholder, the ESOP owns at least 30% of Company stock and Company is a C Corp., selling shareholder(s) of “eligible” shares can rollover sale proceeds tax-free into “qualifying replacement property” under IRC sec. 1042. S Corp. shareholders do not have this privilege.
4. If ESOP is leveraged, all the purchased stock resides in a “suspense account” inside the ESOP and the shares are allocated to participants each year as the loan is repaid through Company cash contributions to the ESOP.
5. Stock from the suspense account or stock that is contributed directly to the ESOP is usually allocated to participants in proportion to their annual compensation. Employees generally have to work a certain number of hours during the year (e.g., 1000 hours) to receive a year of service for allocation and vesting purposes. Allocations are subject to IRS limits and nondiscrimination rules (with additional “anti-abuse” rules for S Corp. ESOPs) and Company contributions (either stock or cash loan repayments) are subject to IRS deduction limits (more liberal deduction rules apply for C Corp. ESOPs).
6. When participants become eligible for distribution, the ESOP will distribute the applicable shares in the participant’s account and, if the Company is a C Corp., the participant has the right to require the Company to repurchase the stock at the FMV as of the prior year-end (“put” option). Alternatively, the Company may have the ESOP distribute benefits in cash. In this case, either cash must be in the ESOP from prior Company contributions or the Company must repurchase stock from the ESOP to fund the distributions. S Corp. ESOPs generally pay participants in cash, and there is no right to receive stock.
Who Should Participate
Human Resources professionals, Business Owners, and/or Finance professionals
Extra Learning Material
All Registered HR.com members are also eligible for:
I have presented at almost 100 national conferences and seminars over the past 12 years. I have written articles for the NCEO, ESOP Association, Amer. Society of Pension Professionals and Actuaries, Family Firm Institute and Beyster Institute at UCSD
Staffing and Recruitment
Pay For Performance
PM Succession Planning
Incentives Measurement, Reporting and Analysis
Compensation Measurement, Reporting and Analysis
Compensation Planning and Management
Incentives, Rewards and Recognition
Incentives Planning and Management
Salary Survey Planning and Management
Stock Planning and Administration
Pay for Performance Planning and Management
Executive Compensation Management
What You Will Learn
HR Professionals will learn about the alternatives for succession planning. Many business owners like to use ESOPs to ease out of the business flexibly. I will cover Basic ESOP concepts and be prepared for advanced questions. Finally, I will cover pointers on how to install an ESOP efficiently
Who is Eligible
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