employee stock ownership

There are many ways employee ownership can be accomplished. Learn ESOP for dummies and how the employee stock ownership plan works.

Many things go into deciding where you want to work.

Maybe the job is in your field and a great way to get your foot in the door. Maybe the pay is too awesome to pass up. But one of the biggest reasons people select their jobs is the benefits package.

A truly good benefits package is becoming something of a rarity these days. Rising costs of doing business and offering the benefits are causing employers to cut down on benefits. That’s why, if you find an employer with good benefits, you have to jump on the opportunity.

One such benefit is the employee stock ownership plan (ESOP). Not sure what this is and need an ESOP for Dummies? We’ve got you covered. Read on to learn all about them!

ESOP for Dummies Basics: What Is an ESOP?

An ESOP is a type of fringe benefit offered by employers to employees as part of their benefits plan. It is a qualified defined-contribution employee benefit plan, like retirement. Stock options give employees the opportunity to own part of the company they work for.

An ESOP works by putting funds from the company into a pool which is used to purchase shares of the business. The owners of the company then transfer ownership of the shares to employees as a benefit or reward for performance. Employees never have to pay to purchase the shares.

Stock options are a great way for employees to make financial plans for the future. Plus, unlike retirement plans and 401(k)s, employees do not have to make contributions to ESOPs.

Unleveraged ESOPs

Unleveraged ESOPs are the most common and basic form of ESOP. It’s a pretty simple process: companies pay into a plan and money from that plan is used to buy shares of the company. If shares are available, they can buy them outright, otherwise, the company has to buy out current owners.

Since these shares are distributed over a period of time, unleveraged ESOPs are much more beneficial for employees who stay with a company for a long time rather than those who are there for a short time.

Leveraged ESOPs

Leveraged ESOPs are fairly common and more financially complicated than unleveraged. As their name suggests, the company takes out loans from a bank to buy the shares of stock. The company then makes periodic contributions to the ESOP in order to repay the loans.

Leveraged ESOPs work well for companies that want to buy out the shares of stock from the current owners as soon as possible. Otherwise, in the case of unleveraged ESOPs, the company would have to buy the shares over time.

Issuance ESOPs

The least common ESOP is the issuance ESOP. Here, instead of buying back shares of the company, the company issues new shares of company stock. The company uses the plan to purchase those new shares and then distributes the shares to employees.

The downside to issuance ESOPs is that they dilute current ownership shares. But, on the upside, business owners do not have to contribute profits to the plan in order to make this work.

Ready for More Benefits?

As you can tell from this ESOP for Dummies, employee stock ownership plans are one of the best fringe benefits employers offer. It makes the work you do so much more satisfying when you know that you’re contributing to the success of a company you own in part. Look for ESOPs next time you’re on the job market!

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