As the name implies, Employee Stock Ownership Plans offer employees the opportunity to become owners of their company by having shares of stock allocated to their accounts in a tax-qualified trust. Technically, an ESOP is a tax-qualified defined-contribution plan designed to invest primarily in the stock of the sponsoring employer.
Usually, employees do not pay outright for the stock, nor do they have the option to buy more stock at a later date. Rather, the stock is allocated to their accounts as an employee benefit according to a nondiscriminatory formula that may be based on any of the following:
-Relative compensation
-Seniority
-Combination of characteristics
ESOPs are subject to many of the same requirements that apply to other tax-qualified benefit plans with some allowed exceptions to facilitate an investment in employer stock.
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