Employee Stock Ownership Plan (ESOP) - ESOPs in The United States

ESOPs in The United States

There are annual limits on the amount of deductible contributions an employer can make to an ESOP. ESOPs are governed by federal pension laws, called the Employee Retirement Income Security Act, or “ERISA”. ERISA sets forth clear requirements to ensure that there can be no ‘preferred’ classes of participants in an ESOP; all employees must be treated proportionally the same. Internal Revenue Code section 404(a)(3) provides for an annual limit on the amount of deductible contributions an employer can make to a tax-qualified stock bonus or profit-sharing plan of 25 percent of the compensation otherwise paid or accrued during the year to the employees who benefit under the plan.

The National Center for Employee Ownership estimates that there are approximately 11,300 employee stock ownership plans for over 13 million employees in the United States. Notable U.S. employee-owned corporations include the 150,000 employee supermarket chain Publix Supermarkets, McCarthy Building Company and photography studio company Lifetouch. Today, most private U.S. companies that are operating as ESOPs are structured as S corporation ESOPs (S ESOPs).