Which one of the following is the primary benefit of employee stock ownership plans
|
Succession planning can be a challenge for privately-held business owners. Finding the right buyer can be difficult and time consuming. In some cases, owners may want to transition their business to their current employees, but the employees may not have the financial means to consummate a sale. An Employee Stock Ownership Plan (ESOP) may be the solution. ESOPs can be very successful when implemented in the right situation,
allowing owners to create sustainable and transferable value, and a well-prepared & successful exit, while at the same time deliver the best possible benefit to employees. AAFCPAs advises commercial business owners to strongly consider the benefits of ESOPs for succession planning, to borrow money at a lower after-tax cost, or to create an exciting additional employee benefit. ESOPs can be an under-utilized tool because their benefits are not fully understood. ESOPs Provide a Variety of Significant Tax Benefits for Companies and Their Owners. ESOP Rules Are Designed to Assure the Plans Benefit Employees Fairly and BroadlyEmployee ownership can be accomplished in a variety of ways. Employees can buy stock directly, be given it as a bonus, can receive stock options, or obtain stock through a profit sharing plan. Some employees become owners through worker cooperatives where everyone has an equal vote. But by far the most common form of employee ownership in the U.S. is the ESOP, or employee stock ownership plan. Almost unknown until 1974, ESOPs are now widespread; as of the most recent data, 6,460 plans exist, covering 14.2 million people. Companies can use ESOPs for a variety of purposes. Contrary to the impression one can get from media accounts, ESOPs are almost never used to save troubled companies—only at most a handful of such plans are set up each year. Instead, ESOPs are most commonly used to provide a market for the shares of departing owners of successful closely held companies, to motivate and reward employees, or to take advantage of incentives to borrow money for acquiring new assets in pretax dollars. In almost every case, ESOPs are a contribution to the employee, not an employee purchase. ESOP RulesAn ESOP is a kind of employee benefit plan, similar in some ways to a profit-sharing plan. In an ESOP, a company sets up a trust fund, into which it contributes new shares of its own stock or cash to buy existing shares. Alternatively, the ESOP can borrow money to buy new or existing shares, with the company making cash contributions to the plan to enable it to repay the loan. Regardless of how the plan acquires stock, company contributions to the trust are tax-deductible, within certain limits. The 2017 tax bill limits net interest deductions for businesses to 30% of EBITDA (earnings before interest, taxes, depreciation, and amortization) for four years, at which point the limit decreases to 30% of EBIT (not EBITDA). In other words, starting in 2022, businesses will subtract depreciation and amortization from their earnings before calculating their maximum deductible interest payments. New leveraged ESOPs where the company borrows an amount that is large relative to its EBITDA may find that their deductible expenses will be lower and, therefore, their taxable income may be higher under this change. This change will not affect 100%-ESOP owned S corporations because they don't pay tax. Shares in the trust are allocated to individual employee accounts. Although there are some exceptions, generally all full-time employees over 21 participate in the plan. Allocations are made either on the basis of relative pay or some more equal formula. As employees accumulate seniority with the company, they acquire an increasing right to the shares in their account, a process known as vesting. Employees must be 100% vested within three to six years, depending on whether vesting is all at once (cliff vesting) or gradual. When employees leave the company, they receive their stock, which the company must buy back from them at its fair market value (unless there is a public market for the shares). Private companies must have an annual outside valuation to determine the price of their shares. In private companies, employees must be able to vote their allocated shares on major issues, such as closing or relocating, but the company can choose whether to pass through voting rights (such as for the board of directors) on other issues. In public companies, employees must be able to vote all issues. Uses for ESOPs
Major Tax BenefitsESOPs have a number of significant tax benefits, the most important of which are:
Note that all contribution limits are subject to certain limitations, although these rarely pose a problem for companies. CaveatsAs attractive as these tax benefits are, however, there are limits and drawbacks. The law does not allow ESOPs to be used in partnerships and most professional corporations. ESOPs can be used in S corporations, but do not qualify for the rollover treatment discussed above and have lower contribution limits. Private companies must repurchase shares of departing employees, and this can become a major expense. The cost of setting up an ESOP is also substantial—perhaps $40,000 for the simplest of plans in small companies and on up from there. Any time new shares are issued, the stock of existing owners is diluted. That dilution must be weighed against the tax and motivation benefits an ESOP can provide. Finally, ESOPs will improve corporate performance only if combined with opportunities for employees to participate in decisions affecting their work. This article is about ESOPs in the U.S., which follow specific U.S. tax and retirement plan laws. A benefit plan in another country called an ESOP may be very different. For example, an "ESOP" in India is a stock option plan, which has nothing to do with a U.S. ESOP. For a book-length orientation to how ESOPs work, see Understanding ESOPs. For an infographic that visually explains ESOPs, see How an ESOP Works at ESOPinfo.org. What are the benefits of an employee stock ownership plan?In the simplest terms, an Employee Stock Ownership Plan (ESOP) is a retirement plan. But, in reality, it is much more than that: ESOPs motivate employees, increase productivity, improve worker retention, keep jobs local, contribute to business longevity, and so much more.
What is one of the benefits of employee stock ownership plans quizlet?-Enables employees to acquire meaningful ownership interest in the companies they work for. -An ESOP is a type of retirement plan that invests primarily in company stock and holds its assets in a trust, in accounts earmarked for employees.
What is an employee stock ownership plan quizlet?Employee Stock Ownership Plan. (ESOP) A plan whereby employees gain significant stock ownership in the organization for which they work. Advantages of ESOP. Favorable tax treatment for ESOP earnings. Employees motivated by their ownership stake in the firm.
What is ESOP specify any two benefits of ESOP?ESOPs are designed so that employees' motivations and interests are aligned with those of the company's shareholders. From a management perspective, ESOPs have certain tax advantages, along with incentivizing employees to focus on company performance.
What does employee stock ownership plan mean?An employee stock ownership plan (ESOP) is a retirement plan in which an employer contributes its stock to the plan for the benefit of the company's employees.
|
