Five Things Employee Owners Need to Know About Their ESOP

Editor’s note: This is part three of a six-part series in which Peter Newman, CFA, of Peak Wealth Planning, explains the benefits of employee ownership for the U.S. workforce. There are more than 6,500 Employee Stock Ownership Plans, or ESOPs, in the U.S. covering almost 14 million employees. Part one is Five Key Advantages to Working at an Employee-Owned Company. Part two is How Does an Employee Stock Ownership Plan, or ESOP, Work?

For participants, an ESOP, or Employee Stock Ownership Plan, can be an important component of their retirement income. Now that you’ve read about the benefits of company paid contributions, learned the advantages of working for an employee-owned company and know how ESOPs work, let’s dive into five essential questions employees should learn about their retirement benefits.

1. How much does the company contribute to my ESOP annually?

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Some employee-owned companies attempt to maintain contributions as a steady percentage of an employee’s salary. For example, one company might opt for 5% of a salary of $80,000, which would equal a $4,000 ESOP contribution for the year.

For other companies, contributions vary each year depending on profitability. This makes it harder to forecast your future balances and may indicate a need to save more in other retirement accounts.

2. How do I know my ESOP value?

While employed, a worker doesn’t directly own shares of the company. The shares are kept in a retirement account for the employee’s benefit and disbursed once a vested employee is terminated, retired, disabled or otherwise leaves the company. Employees receive a statement each year showing the number of shares and value.

For example, an employee’s statement might show they have 2,100 shares with a per-share value of $85, resulting in an ESOP account balance of $178,500.

3. How has the share price changed across the past 10 years?

If the share price has been increasing, chances are the company is doing well financially and your wealth may continue to grow from increases in share value. Knowing the average percentage change in share price can be used to forecast the value of your ESOP account for retirement. If you are over age 55 with a company whose shares have increased dramatically, you may want to consider diversifying a portion of your ESOP when eligible to take some risk off the table. Even companies doing well can fall on hard times.

Some current and formerly employee-owned companies that have experienced significant share price increases, and created many millionaires, include Clif Bar, Amsted Industries, Inc., Murray Company Mechanical Contractors, New Belgium Brewing and Springfield Remanufacturing Corp., to name a few. Keep in mind, most employee owners work a couple of decades to experience this type of wealth, and there is no guarantee you will become a millionaire through employee ownership. So, be sure to contribute to your 401(k) and other retirement accounts.

4. When will I be paid for my ESOP?

Employee owners with 10 or more years of service are eligible to get paid for their stock at age 55 (up to 25%) and age 60 (up to 50%) with the remainder in substantially equal payments over a five-year period at normal retirement age (usually 65). The timing above is common, but keep in mind that your company’s plan may have different rules. Employees receive a letter explaining how much they can withdraw and a form to indicate whether to receive a check or roll over their ESOP funds to an IRA or their 401(k).

Employees should work with their financial adviser or CPA to understand the tax consequences of receiving a check vs. rolling over the funds to another tax-deferred account. And, keep in mind there could be a gap of weeks to months between requesting a payment and receiving the funds. Check with your ESOP representative on the timing.

5. What is the company match for the 401(k) plan?

The majority (94%) of employee-owned companies also offer 401(k) plans. However, some will match an employee’s contribution, while others will not. When offered, this match is usually up to a percentage of salary. As an example, if an employee making $80,000 a year contributes 10%, or $8,000, to their 401(k), the company might match that amount up to 5%, or $4,000, for a total 401(k) contribution of $12,000. If your company does not offer a match, you should consider contributing at least 15% of your salary to the 401(k) each year.

Stay informed about your ESOP

Be an active employee owner by staying up to date on your ESOP's performance. You can do this by reviewing your statements and participating in company meetings. Also, keep an eye on the stock price and monitor any changes in the company's financial situation so you can make informed decisions regarding your diversification options. Be sure to consider your 401(k) and ESOP account balances when forecasting your retirement income.

You won’t want to miss the next article in our series, Should My ESOP be My Only Retirement Account. This will cover how to use your ESOP, 401k, IRA, and taxable brokerage account together with social security to create a secure retirement income plan. This will be published in March 2024.

Are you comfortable with your progress toward retirement? Are you confident you’ll know how to handle your ESOP diversification and distribution when the time comes? Do you need help forecasting how your ESOP and 401(k) can generate retirement income? A wealth manager from the Peak Wealth Planning team can assist.

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