Employee Stock Ownership Plans vs. Employee Stock Purchase Plans

Employee stock ownership plans (ESOPs) and employee stock purchase plans (ESPPs) represent two popular employee benefit options. As a business owner, you’ll have to decide which plan is best for your

An ESOP allows employees to own stock in the company without having to purchase shares. In general, ESOPs are more common among closely held companies. There are more than 10,000 ESOPs in the United States today, making them the most common form of employee ownership. ESOPs are usually created when a retiring owner wants to transfer ownership of the company to one or more employees.

ESPPs allow employees to use after-tax wages to purchase stock in their companies, usually at a discounted price. ESPPs are found mostly in publicly held companies; private companies that institute ESPPs stand a good chance of triggering U.S. Securities and Exchange Commission regulations they would otherwise avoid.

Choosing the Right Plan
The decision to start an ESOP or ESPP depends in part on your management philosophy. You'll need to ask yourself how committed you are to the concept of employee ownership, either through employee stock ownership or some other means. Companies with employee-owners often boast higher productivity and increased employee loyalty, longevity and satisfaction. But according to management experts, the best way to make your employees owners is to give them shares in your company rather than asking them to pay for their shares.

Before you choose a plan, you’ll also have to consider how differences between ESPPs and ESOPs will affect your employees' financial well-being and your company's bottom line. For example, employees don't pay to participate in an ESOP; instead, the company contributes funds to employee accounts within a trust that invests in the company's stock. Other differences include:

• Tax implications. The money in an ESOP account is tax deferred until an employee retires. In an ESPP, however, employees purchase stock with their own after-tax dollars and must pay capital-gains taxes when they sell their shares. In addition, companies may deduct their ESOP contributions within certain limits, and business owners can sell their shares and defer taxes as long as they roll the money into qualified U.S. securities.

• Access to stock balances. ESOP participants don't have access to their balances until they retire or leave the company, similar to 401(k) plans. In an ESPP, employees can exercise their options whenever their company vesting schedule allows them to do so (usually after a year or two of service).

• Employer costs. As a rule, ESOPs cost more to start and administer. Private companies are required by law to purchase ESOP shares from departing employees, which can be a major expense. In addition, private companies with ESOPs must pay appraisers to determine their stock prices each year.