ESOP Distribution Policy: Choices, Consequences, & Compromises

By Tina DiCroce

White Paper Overview:

The employee stock ownership plan (“ESOP”) distribution policy—the policy which dictates the timing, method, and form in which participants receive their ESOP account balance upon termination—is a key element of plan design. Accordingly, company leaders should thoughtfully approach the development of their policy as well as changes to the policy that may be necessary after the plan’s inception. What works well early in the life of the ESOP may not work as well years later. With careful consideration and attention, distribution policy is a tool ESOP companies can use to manage repurchase obligations (“RO”) and participant benefit levels throughout the ESOP lifecycle.

It is important that company leaders understand the benefits and consequences of various choices when designing or amending its distribution policy. Once leaders have a complete understanding of the many elements of distribution policy, they can reflect on the company’s values and its financial situation and identify a policy that aligns well with the goals for the ESOP and the corporation. Each company may benefit from a different set of distribution rules. Therefore, it is important to do a thorough, company-specific analysis before establishing or amending your policy.

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