Employee ownership plans can be owner exit strategy

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Employee stock ownership plans, or ESOPs are set up with the same formalities as other retirement plans, according to Jim McLeod, attorney with Lathrop & Gage. The big difference in the plan is that employees become owners in the business through stock purchases.|ret||ret||tab|

Like other retirement plans, ESOPs must meet IRS guidelines. It can take three to six months to set up an ESOP, and the process begins with a feasibility study, according to Gary Powell, an attorney with Husch & Eppenberger LLC.|ret||ret||tab|

A written plan must then be devised with a summary provided to the employees who will be the beneficiaries. The stock must be independently appraised and the company valued, Powell said. Most of the time a bank loans the money to buy the stock in the company.|ret||ret||tab|

"The ESOP is responsible for the loan and the company guarantees it," he said.|ret||ret||tab|

There must be a loan provision to make it a true ESOP, McLeod said. The money does not have to come from a loan, but it usually does, he said.|ret||ret||tab|

ESOPs can be formed in companies with publicly traded stock, and bigger companies began using them first, according to Dee Robinson, CPA, CVA, a partner in Elliott Robinson and Company. The concept has become more popular in recent years with privately held companies because of the tax advantages to the owner.|ret||ret||tab|

Most of the time an ESOP is established when a company owner retires and wants to pass ownership to his employees. The transaction is a tax benefit to the owner because he can invest the proceeds and defer the gain, Powell said.|ret||ret||tab|

There are no requirements that the ESOP must hold 100 percent of the stock, thus if there are two owners and only one retires, he can sell his shares and still be entitled to the tax benefit, Powell said.|ret||ret||tab|

An even greater tax advantage has been realized by S corporations since Congress passed a law in 1997 allowing S corporations to sponsor an ESOP. Since the S corporation passes the tax burden to the stockholder and stock is held in the ESOP, which is not taxed, this can create a tax-free entity, according to Powell.|ret||ret||tab|

There are tax advantages to the employee as well. The employee who quits or retires has options for keeping the money generated from the ESOP on his or her behalf. The amount invested by the company is taxed as ordinary income. Any gains are taxed as long-term capital gains at 20 percent, Powell said.|ret||ret||tab|

The employee also can elect to roll the money over into an IRA and defer the tax until he or she begins to withdraw the money.|ret||ret||tab|

Like other retirement plans, there is a limit to how much the employer can contribute to the plan, although the limit is higher with an ESOP than with other plans. In privately held corporations, there must be an annual, independent appraisal of the company to determine the value of the stock, Robinson said.|ret||ret||tab|

Annual reporting to the IRS, the Department of Labor and to the employees vested in the plan, is also required, according to Robinson.|ret||ret||tab|

Ollis and Company Insurance Agency has had an ESOP in place since 1982. The plan has worked well for the company and the employees are proud of it, according to Richard Ollis, employee/owner.|ret||ret||tab|

The benefit to the customer comes in the form of good service. |ret||ret||tab|

"If you're owner of the company your mentality is different," Ollis said.|ret||ret||tab|

Ollis said his company contributes an average of 11 percent of the employee's wages per pay period to the plan. The stock is distributed annually at the end of each calendar year. Though the stock stays in the plan until the employee quits or retires, an annual summary lets each participant know the value of his or her account.|ret||ret||tab|

Ollis said there are significant costs involved in setting up an ESOP. A tax attorney and usually a CPA are needed to wade through the initial paperwork. At Ollis and Company the process took about six months.|ret||ret||tab|

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