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March 03, 2002 at 07:00 PM
The ESOP financing technique was endorsed by Congress in 1976 and since that time has functioned to provide a ready market for the generally unmarketable stock of closely held corporations.
ESOPs have removed many of the negative tax implications–as well as other uncertainties–regarding the timing and regularity of buyout payments that generally accompany a third-party sale.
ESOPs are widely known as a cost-effective defined contribution retirement plan. They may be set up as either a profit-sharing or money-purchase plan and invest primarily in employer securities.
Once an ESOP trust is created, it is often funded with tax-deductible contributions of either newly issued corporate stock, cash, or both. The size and frequency of the employer’s contribution to the ESOP is at the discretion of the board of directors.
The contribution of newly issued stock is essentially a cash-less paper transaction that can enhance the corporation’s working capital position. The corporations cash contributions can create an immediate ESOP market for existing shareholders who desire to sell their stock.
