Why is Stock Ownership Important?
An employee stock ownership plan (ESOP) is one of the methods of employee participation in corporate ownership. The Phoenix Crane Service, Inc. Employee Stock Ownership Plan (ESOP) has been adopted to provide benefits for eligible employees by investing primarily in the common stock of the company. The Plan provides benefits upon a participant’s retirement, death, or disability. The company intends that beneficial ownership interest in Company Stock will give employees a greater personal interest in the success of the company.
ESOPs were formally recognized as a type of retirement plan in 1974. They are regulated by the Employee Retirement Income Security Act (ERISA), a federal law that sets minimum standards for investment plans in private industry. 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% of the compensation otherwise paid or accrued during the year to the employees who benefit under the plan.
The Plan is designed to provide beneficial ownership of Company Stock for eligible Company employees, the people who are primarily responsible for the success of Phoenix Crane. Thus employees have a stake in the success of the Company. While there is never any guarantee that the value of any investment will increase, by working efficiently and effectively, it may help increase the profitability of the Company, which in turn should increase the value of their account in the plan.
How Employees Get Stock
ESOPs are much like other tax-qualified retirement plans. At least all employees who have worked at least 1,000 hours in a plan year must be included. They receive allocations of shares in the ESOP based on relative pay or a more level formula. If there is an ESOP loan, the shares are allocated each year based on the percentage of the loan that is repaid that year. The allocations are subject to vesting for as long as six years. Employees do not receive a distribution of shares until they terminate due to death, retirement, or disability. The plan is governed by a trustee appointed by the board; employees only have very limited required voting rights (they do not have to elect the board, for instance), although companies may provide additional rights.
It is important to understand that ESOPs do not allow employers to pick and choose who can get stock or to make allocations based on discretionary decisions. It is also critical to remember that ESOPs do not entail employee using heir own money to buy shares. The company funds the plan.