What is an Employee Stock Ownership Plan (ESOP)?
September 23, 2022
Palmer Group is grateful for the privilege of being an ESOP company. Our organization is owned by our people. But what does that mean, and why do we see that as a benefit for our employees, clients, and candidates?
Let’s start with a definition. ESOP stands for Employee Stock Ownership Plan. When a business becomes an ESOP, the workers of that company have a personal stake in the business. This term, however, is not a one-size-fits-all kind of definition. If you type in “ESOP” on the internet, you will quickly find many ESOP plans. This makes the implications of this benefit a little different from company to company.
Our goal is to give a general overview of what an ESOP is. By having a foundational understanding of this term, you can see why this is a benefit to any company. To accomplish that, we are going to do a simple comparison of a traditional 401k plan to a 401k plan with ESOP benefits.
As a traditional employee, you typically have the option of contributing money to a qualified 401k plan to save for retirement. This contribution comes from your paycheck on a pre-tax or Roth basis. Most 401k plans offer an employer match to your contribution based on your income, anywhere from 3-5%. The balance in your 401k grows as you continue to contribute funds and the value of your 401k investments increase.
Having a solid 401k plan is a great investment for your future. You are putting money away in the bank for the years to come. But what if your investment return could be even greater, without more money coming out of your paycheck?
Traditional Employment + ESOP
As an employee working with an ESOP company, you gain discretionary shares on an annual basis distributed through the ESOP plan. You still get the advantage of your pre-tax or after-tax contributions to a 401k for retirement savings. At the same time, you are earning shares of the ESOP through discretionary contributions. This monetary amount is coming out of the company profits, so this gives you two avenues for building wealth for retirement.
ESOP participants on average enjoy a greater retirement account balance than those with a traditional employment plan. You can almost think of it like an end-of-the-year bonus; the income from an ESOP plan is a bonus to your existing retirement plan.
Regardless of what ESOP plan a company has, they are not get-rich-quick plans; however, they have the potential to supplement your retirement income, which is a significant benefit.
Palmer Group is grateful to be an ESOP company. This allows our people to have ownership in our business and invest in the future of our company. If you have further questions on this topic, please contact us to learn more.