ESOP promoters are quick to point out the significant economic benefits to ESOPs, mostly related to preferential tax treatment of ESOP contributions and distributions. However, there are a number of problems with ESOPs that are not immediately transparent to small business owners.
5 Issues with ESOPsWe have developed a list of problems with ESOPs based, in some cases, on first hand accounts of companies that we were evaluating. Here are a few:
ESOPs are complex and expensive.ESOP is an acronym for Employee Stock Ownership Plan. ESOPs are qualified, defined contribution, employee benefit plans that are regulated by the Employment Retirement Security Act of 1974 (better known as ERISA) and, thus, subject to byzantine rules. The ESOP Association itself suggests that "plan sponsors consider the following":
- Seek professional help in designing the ESOP documents including the Plan Document.
- Strictly adhere to fiduciary structure and document all governance steps and decisions.
- Continually review the investment of employer stock and develop a list of factors to be reviewed. Follow and update that list as appropriate.
- Communicate accurately when discussing employer stock with employees and make sure they are clearly advised of the risks inherent with an employer stock investment.
- Consider engaging in an independent trustee to serve participant interests, or a qualified outside firm for plan administration and record keeping. Request indemnification from outsiders for any errors they may make and obtain evidence of their errors and omissions insurance policy.
- Purchase adequate Fiduciary Liability Insurance.