The Employee Stock Ownership Trust – A New Trend In Employee Benefits and Corporate Finance
Article by: John D. Menke http://www.menke.com
An increasing number of companies are turning to Employee Stock Ownership Trust financing as a means to simultaneously raise low cost capital and provide increased employee incentives and retirement benefits while reducing the cost of qualified plan benefits. The Employee Stock Ownership Plan is a qualified plan under Section 401(a) of the Internal Revenue Code. As such it is in the same family as pension plans, profit sharing plans and stock bonus plans. Nevertheless, The Employee Stock Ownership Plan (which together with the Employee Stock Ownership Plan, is referred to as the “Trust” or “ESOP”) is qualitatively different from other types of “qualified plans,” both in its concept and in its applications.
Because of its inherent flexibility, because of its ability to facilitate and enhance corporate growth and because of its separate status under the recently enacted Pension Reform Act, the ESOP possesses an assortment of unique advantages not possessed by other qualified plans. As a consequence the ESOP is destined to become an increasingly popular form of employee benefit plan. A general working knowledge of the benefits, advantages and uses of the ESOP is a “must” for corporate loan officers, trust officers, estate planners, deferred compensation specialists, employee benefit specialists, corporate financial consultants, CPAs, CLUs and other income tax advisors.
Advantages of ESOP
The ESOP is at one and the same time a plan of corporate finance, an employee incentive plan, an executive compensation plan, and an employee retirement plan. Moreover, the ESOP may be used by either a public or a private company and may be used either with or without financing. In addition, the ESOP creates a market, comparable to that of a publicly traded company, for the sale of a minority or controlling interest in a closely-held company. By using an ESOP a company also avoids the funding problems inherent in certain other types of qualified plans. Because 3n ESOP can be designed to simultaneously serve all of these functions, the ESOP is inherently more flexible than other types of qualified plans.
Facilitating Corporate Growth
Today’s capital starved economy has created a host of problems for the growing company. In addition to the unprecedented need for additional capital for corporate growth and expansion, the corporation of today is also faced with increasing demands of employees for greater employee benefits, with declining employee incentives and productivity, and with a newly enacted Pension Reform Act, which substantially increases the costs of funding conventional employee benefit plans.