Consider an ESOP stock plan for a small business

Staff Writer
Times Herald-Record

If you own or have the inclination to own a small business, take time to become familiar with ESOP basics.

An ESOP is a profit-sharing stock bonus plan usually set up by the owners of a closely held business.

It spreads some or all ownership to employees of that business. It is also a tax-deductible contribution and tax-deferred retirement plan.

Shares are transferred to employees following legal rules, such as minimum hours worked, and value is disbursed years later, under other strict and complicated rules.

The Internal Revenue Service (irs.gov) provides extensive legal hoops for the formation, control and disbursement of assets.

As you can see, establishing and managing an employee stock ownership plan is not a do-it-yourself process. Pros are required to set up and manage ESOPs.

Many rules, such as vesting, disbursement ages and penalties are similar to 401(k) and IRA rules, but not exactly.

Small plans can be expensive to establish, but have payoffs. Statistics point to faster business growth and better profits.

Why? Employees share in profits, so they work harder, think about bettering the company and sit on boards making decisions from feet-on-the-ground, hands-on perspectives.

Everyone benefits when all employees are more motivated about efficiencies to make a product better, faster or more efficiently move stock from back rooms to retail areas rather than dawdling on their cell phones or dreaming into outer space.

ESOPs transfer money to participating employees within this type of retirement program as stock shares in the business.

Following several years of employment or at designated ages while still working at the company, an employee may diversify a percentage of the value of their account into other investment choices, like a mutual fund unrelated to the employer stock.

This helps alleviate a long-term employee’s reliance on a retirement account 100 percent weighted in one company's stock - in this case, the same company they still rely on for a paycheck.

At certain junctures, people may roll a portion of money out to an IRA, keeping it tax-deferred, or into a Roth IRA that will be hit by tax on its path to the Roth.

As mentioned, one downside is that a large portion of an employee’s retirement may become concentrated in the same company that issues their paycheck, rather than in a diversified stocks-and-bonds portfolio.

Prudent employees should diversify into other tax-deferred and non-tax deferred investments in addition to the ESOP. Things can change for better or worse as an ESOP ages. Share values can fluctuate up or down and enhance or pinch retirement funds.

As with many segments of business, there is at least one association to turn to for guidance. The National Center for Employee Ownership (www.nceo.org) is loaded with information.

Charlene Maurer Finerty, owner of Plans and Profits, LLC, edits, teaches and writes custom business plans. See PlansAndProfits.com. She also offers a Write-Your-Own-Business Plan class on DVD at BusinessPlanWritingClass.com. Email finerty@aol.com anytime or call 343-1515 from 9 a.m.-7 p.m. Her column appears alternating Mondays.