ESOP: Fast Facts & Planning Tips

The National Retirement Planning Coalition has designated April 11-15 as the 2016 National Retirement Planning week. In celebration, each day this week Watkins Ross will share some fast facts and planning tips on the various types of retirement plans we service. Tuesday’s focus: Employee Stock Ownership Plans (ESOPs).


FAST FACTS

ESOP Stat

Additionally
  • ESOPs make significant contributions to employee retirement savings with nearly 60% of ESOP companies contributing at least 6% or more of compensation to the ESOP.
  • A Washington State study found that ESOP participants made 5%-12% more in wages and had 3 times the retirement assets than workers at comparable non-ESOP companies.
  • The ESOP Association, one of the largest ESOP advocacy groups in the US, reports that 68% of its members have fewer than 250 employees.
  • ESOP companies experience 2.3%-2.4% more growth in sales and employment in the post-ESOP period than would have been expected based on the pre-ESOP period analysis.

PLANNING TIPS

1. CUT THE TAX
Tax incentives to encourage the sale of stock to ESOPs may allow shareholders who sell to an ESOP to defer or eliminate capital gains tax on the sale of their stock.
2. STAY IN CONTROL
By selling to an ESOP, selling shareholders can stay involved in the management and control of their company while also monetizing what may be their most valuable asset.
3. CUT THE TAX II
S-Corporation ESOPs pay no federal income tax on the portion of the company owned by an ESOP. A 100% ESOP owned S-corporation pays no federal income tax. This tax treatment allows ESOP companies to free up cash otherwise used to pay taxes to gain competitive business advantages and reward employees.
4. ESOPs PROVIDE LIQUIDITY
ESOPs can provide a valuable liquidity tool to exiting shareholders and also allow the company to obtain capital to effect the buyout on a tax advantaged basis. As a result, they can be instrumental in the succession planning of companies with multiple shareholders.

WHAT DOES THIS MEAN?

THE TIME IS RIGHT
Current market conditions are creating a surge in ESOP transactions. Business valuations of closely held companies have recovered from the economic downturn of the mid-2000s to near record highs and business owners are locking in gains. This fact, combined with the increased availability of relatively inexpensive capital looking to get in the market, make now the time to consider implementing an ESOP.
To learn if an ESOP might be right for your company or client, contact the team at Watkins Ross.

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