by Patricia A. Coldiron

Created on: April 25, 2010

An Employee Stock Ownership Plan (ESOP), is a benefit plan for employees, which allows employees to become owners of company stock. Companies that wish to offer an ESOP, set up a trust, make yearly contributions to the trust, and distribute these contributions to individual employee accounts.

 You can receive ESOP distributions in a number of ways. If you have questions about ESOP distributions, consult your plan administrator.

Employment Termination

Once you terminate your employment, your ESOP benefits may be paid at different times, depending on whether you retired, died, or terminated because of a disability, or left the company for another reason.

If you retire, are disabled, or die, ESOP vested benefits must be distributed during the plan year after the event occurs, unless one of the following exceptions applies.

 If your termination is for reasons besides retirement, disability, or death, the distribution of your ESOP benefits may be delayed, but cannot begin any later than the sixth plan year following the plan year that your employment terminated.

 If the ESOP received a loan to buy stock, and is still paying on the loan, distributions to employees who are no longer with the company do not have to begin until the plan year following the plan year that the loan is paid back.

 As part of the Tax Reform Act of 1986, if you acquired your ESOP before 1987, you may receive your distribution according to the rules that govern other qualified benefit plans. In some cases, you may be able to terminate employment, and wait until retirement age to receive your distribution.

 Employee

 You may be eligible to receive distributions from your ESOP while you are still employed. Your company may elect to pay dividends on company stock directly to your account.

 “If you’re still employed, are at least a 5% owner, and have reached the age of 70 ½, you must start receiving distributions from your ESOP plan,” according to the National Center for Employee Ownership. If you prefer, you can roll your distributions into an IRA account, and reinvest the funds any way you like.

Once you reach age 55, and have been an ESOP plan member for ten years, you may diversify up to 25% of company stock that the ESOP obtained after December 31, 1986, and has designated to your account. In the sixth year, you may diversify up to 50%, minus shares that you have already diversified. To meet diversification requirements, your ESOP must give you a distribution in cash or stock, or provide three different investments under either the ESOP, or a plan such as a 401 (k).

Vested Benefits

You must work a certain amount of time to become vested, which guarantees you certain company benefits. As an ESOP participant, terminating employment before you are fully vested means you will forfeit the benefits that are not vested, and these benefits may be redistributed to other plan participants. An ESOP follows two minimum schedules in regard to vesting procedures.

 You cannot be vested during the first two years of employment, but become 100% vested once you reach your third year of service, or you receive 20% vesting following your second year of employment, and each year you receive 20% more, until you’re 100% vested after your sixth year of employment.

Learn more about this author, Patricia A. Coldiron.
Click here to send this author comments or questions.