Year-end planning for an ESOP?

If your company already operates as an ESOP, there are key steps to take to ensure your plan is optimized and remains compliant.

1. Satisfy Your Internal Loan Requirements

For leveraged ESOPs, shares are allocated to employees as the company’s internal loan to the ESOP trust is repaid. This process involves annual tax-deductible cash contributions from the company to the ESOP trust, which then returns the funds to the company as loan payments in exchange for shares.

Make sure you’ve met all of your annual obligations outlined in the ESOP Promissory Note, including loan payments, interest rates, and any preferred dividends or contributions that are due. Failure to meet these requirements can trigger penalties or action from the IRS, Department of Labor, or the ESOP trust itself.

2. Evaluate ESOP Performance

Year-end is the perfect time to assess how well your ESOP is performing. Ask yourself the following questions:

• Do employees understand the benefits of the ESOP, and are they engaging with it?

• Has the ESOP had a noticeable impact on employee retention, productivity, and engagement?

• Are the economic benefits, such as tax efficiency and cash flow improvements, being realized as expected?

• Is your financing structure sustainable given current market conditions?

ESOPs that are at least three years old may benefit from a formal evaluation. Options like loan restructuring, plan modifications, secondary sales, or buybacks can be explored to improve plan performance.

3. Plan for Repurchase Liabilities

As an ESOP matures—typically five years or older—companies need to prepare for an increase in share redemptions as employees retire or leave the company. This can place a financial burden on the company, which must repurchase shares from departing employees.

Conducting a Repurchase Liability Study (RLS) can help you anticipate the cash requirements needed to meet future repurchase obligations. An RLS will forecast your financial impacts and help you ensure the long-term sustainability of the ESOP. If challenges are identified, the study can provide a clear path to mitigating those risks.

Consult an ESOP Advisor

If you’re facing any uncertainties about your ESOP, it’s always a good idea to consult a professional advisor. An ESOP is a complex and multifaceted plan, and having expert guidance can make all the difference in optimizing the benefits for your business and employees.

At the end of the day, whether you’re considering an ESOP or managing an existing one, proper planning and proactive management can ensure that your ESOP continues to provide value for your employees and your company for years to come.

By staying ahead of these year-end considerations, your company can position itself for long-term success and stability under an employee ownership model. Take time now to review your ESOP strategy, engage with the right advisors, and ensure that your company is fully prepared for the coming year.