Question for Boston Money Coach:
Can I cash out my company ESOP? Bob from Portland
Response from Boston Money Coach Steve Stanganelli:
Thanks, Bob, for your question.
First, let’s take a step back and review the basics. In the alphabet soup of finance, an ESOP stands for Employee Stock Ownership Plan. To be clear, this has nothing to do with stock options – those are an entirely different animal.
Employee Ownership: Claiming Your Piece of the Rock
These ESOPs are voluntary programs offered by some employers which allow employees to “own a piece of the rock” they call work. (For those who may catch it, that’s a reference to an old ad jingle for Prudential Insurance – boy, I’m just dating myself here). Right now, employees own about 8% of corporate equity, a conservative estimate. (Not a small rock in the world of corporate finance).
According to the National Center for Employee Ownership, there are about 11, 000 such plans offering about 10 million employees stock in their companies in the US. Such arrangements include ESOPs as well as stock bonus plans. Employees also participate in ownership through stock options offered (covering about another 10 million). When considering that there are 401(k) plans out there that also offer company stock as a choice, the number of employees owning a piece of their rock jumps to about 28 million.
The scary number here is that for those who have access to company stock in a 401(k), more than 5 million workers are invested primarily in their company stock. (There’s a good thing and then there’s too much of a good thing. This is a case of “too much.” Can you say “Lucent Technologies” or “Wang” anyone?)
Depending on the plan, the employee may have to pay something (usually a discounted stock price) or pay nothing at all (the employer covers the cost usually by offering stock from the corporate treasury.)
Effective Business Owner Transition Plan
Companies offer these plans for a number of reasons. Sure, they want employees to have their interests aligned with management and owners with all pulling oars in the same direction. And generally, those firms which offer plans tend to show better overall growth compared to firms that don’t. According to NCEO, “a 2000 Rutgers study found that ESOP companies grow 2.3% to 2.4% faster after setting up their ESOP than would have been expected without it.”
But a real benefit for an ESOP is taxes and a transition plan for the company and its owners. This is because ESOPs are primarily a tool of private firms (97% of ESOPs are used in private firms) and they allow companies to provide departing owners liquidity for their shares in a tax-favored way. Employer contributions to fund the plans are tax deductible, too.
Companies encourage employee participation because of IRS rules that allow those ESOPs in private C-corporations with at least 30% ownership to defer taxation on any gains made on company shares by reinvesting in shares of other companies.
When you decide to sell your shares, all you need to do is contact your ESOP representative at your company. This may be someone in your human resources department or you will be directed to an outside company which administers the program and manages the liquidation process. The procedure should be outlined in your employee handbook.
You’ll be provided with paperwork to initiate the process and you’ll receive a check with your proceeds based on the current value of your shares. This may take a few weeks.
Tips & Cautions
- Keep track of your statements and the number and value of your shares
- Maintain any written correspondence with your ESOP administrator
- Set aside money for taxes to avoid a surprise at tax filing time – 35% is a conservative number
So if you’re one of the lucky ones to have this benefit, consider the positive impact of stock ownership in your company as part of your overall financial plan. And now that you have been an owner, consider the equally positive benefits – and diversification – of being an owner of other companies as well – through stock, ETFs, mutual funds either within your 401(k) or a separate investment account.