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Employee Stock Options

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Employee Stock Options
Term paper on ESOP

Submitted by
Hitesh.K.R
(1pi11mba59)
Finance
Cohart 1

What is an ESOP?

ESOP stands for Employee Stock Ownership Plan and is an employee benefit plan which makes the employees owners of stock in that company. An ESOP is required by law to invest primarily in the stock of the sponsoring employer. An ESOP is a qualified defined contribution plan and is similar to profit sharing plans. The employer can use it as a conduit for borrowing money from a bank or other lending institution. To set up an ESOP, the company creates a trust and makes annual contributions.
Allocations can be in proportion to compensation, according to years of service, or a combination of both. Usually, an employee can join the plan after completing 1 year of service or 1000 hours of service within the year. When a participant in an ESOP plan has at least 10 years of service or reaches the age of 55, he/she must be given the option of diversifying his/her account up to 25% of the value. At the age of 60, the employee is given a one time option to diversify up to 50% of the account. This ruling of for ESOP shares allocated after December 31, 1986.
Formation
ESOPs are qualified employee benefit plans that exist in a highly regulated environment due to federal laws such as ERISA and federal regulatory agencies including the Internal Revenue Service and the Department of Labor. As a result,
ESOPs require considerable advance planning to meet the legal requirements imposed on them and to satisfy the needs of employee participants. Our employee benefits specialists have provided counsel to numerous clients with ESOPs and can assist with the preparation, design and implementation of ESOP plans and trust arrangements.
We have counseled organizations ranging in size from large public companies to small private and family owned businesses in connection with their ESOPs.

ESOPs: The Basics
An employee stock ownership plan is a kind of qualified

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