Urban Legends and Myths About ESOPs

Urban myths and legends are all around us.  After all, I would guess most of you have been contacted by email from someone in Nigeria that is willing to give you free money if you help them move funds to American banks- all they need is access to your bank account (don’t do it!).  You’d be better off wiring money to Bigfoot or the Loch Ness Monster.

One of the most common myths about Employee Stock Ownership Plans (ESOP) is that the management structure of the company will change and that information will be freely shared with all.  Although an ESOP could elect to do these things, it would be the exception and not the rule.

An ESOP does not change the company’s management structure.  Typically the management team that was in place prior to the ESOP continues in the same role following the implementation of the plan (the selling owner may leave depending on their objectives and the percent of the company sold to the plan).  They continue to run the company using the same decision making processes that existed before the ESOP.

The ESOP is a qualified retirement plan.  Therefore, there are some participant reporting requirements:

  • Summary Plan Description (SPD)
  • Annual retirement plan statement showing number of shares, price per share, and account value
  • Summary Annual Report (SAR) for the plan as a whole
  • Trust document, plan document, and Form 5500 if requested

Income statements, balance sheets, executive salaries, and sales plans are not included on that list.  Aren’t owners entitled to have access to this information?

Although we routinely talk about employee owners it may be misleading from a technical perspective.  Eligible employees are allocated shares according to the ESOP features and are contributed to the ESOP trust.  It is the ESOP trust that is the actual owner of the shares.  The ESOP trustee votes the shares in matters of corporate governance, such as electing the board of directors or hiring the chief executive officer.  The ESOP trustee receives the same information that the other owners receive.

There are a few circumstances where the vote is “passed through” to the participants.  These events are merger, liquidation, recapitalization, sale of substantially all of the assets of the company, dissolution, reclassification, and consolidation.  In these instances the plan participants are allowed to vote their beneficial shares in a confidential manner.

An ESOP does not necessitate a change to management processes or require the sharing of detailed financial information.  And no, you don’t have to wait an hour after eating to go swimming.

In addition to blogging here, I also tweet regularly about topics of interest to ESOPs. Click to follow me on Twitter –  @jlripperger.

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While this communication may be used to promote or market a transaction or an idea that is discussed in the publication, it is intended to provide general information about the subject matter covered and is provided with the understanding that none of the member companies of The Principal are rendering legal, accounting, or tax advice. It is not a marketed opinion and may not be used to avoid penalties under the Internal Revenue Code. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, or accounting obligations and requirements.

Insurance products and plan administrative services are provided by Principal Life Insurance Company a member of the Principal Financial Group® (The Principal®), Des Moines, IA 50392.

The subject matter in this communication is provided with the understanding that The Principal® is not rendering legal, accounting, or tax advice.  You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, or accounting obligations and requirements.
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