Technically an ESOP is a
tax qualified defined contribution benefit plan. Functionally ESOPs are a
very flexible financial and equity incentive instrument that uses corporate
tax-deductible or “tax-free” dollars to achieve a variety of
individual and corporate objectives, including shareholder liquidity,
perpetuation, raising working capital, and charitable giving
An ESOP is unlike any
other employee benefit plan in that the ESOP Trust, or ESOT, is designed to
hold primarily stock of the sponsoring employer.
In its simplest form a company
establishes a trust to which they contribute stock or cash to purchase
stock. The stock is then allocated out
to employees individual accounts within the trust. Cash is used to purchase stock from
shareholders and then allocated out to individual employee accounts.
In the leverage ESOP the,
the ESOT borrows the cash to purchase shares then repays the debt with the
contrbutions contributed by the sponsoring corporation.
