SCS Administration (ESOP)









Employee Benifits ESOP

Types of ESOPs

Leveraged ESOP

This is an ESOP that borrows money, usually from a bank, to purchase stock from the company or from existing shareholders. For all other qualified plans, this would be a prohibited transaction, but a special exemption is provided for an ESOP. The ESOP trust purchases stock with the loan, giving the company needed money for expansion, or purchases stock from existing shareholders. The company is able to make fully tax deductible principal and interest payments to the trust which repays the loan. As the loan is repaid, the stock held by the bank as collateral is released to the employees' accounts. Tax deductible contributions of up to 25% of payroll may be made to repay the principal on ESOP loans, plus reasonable dividends and unlimited interest payments.

 

STEPS: EFFECT:
1. Company borrows from lending institution. 1. Loan at favorable interest rate.
2. Company loans funds to ESOP ("Mirror" loan). 2. Pay loan principal with tax deductible contributions.
3. ESOP Purchases stock from company or shareholders. 3. Company increases cash flow, ESOP purchases company stock from shareholders. (Tax deferred sale to shareholders if requirements met.)

Leveraged ESOP- Seller Financed Technique

Non-Leveraged ESOP

A tax deductible annual contribution up to 25% of payroll is made each year to the ESOP in stock and/or cash. This plan is commonly known as a Stock Bonus Plan (SBP).

 

 
STEPS: EFFECT:
1. Company makes a tax deductible contribution of cash or stock. 1. Company increases cash flow and shareholders receive liquidity for company stock.
2. ESOP purchases stock from company or shareholders.

 

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Please call us at 858-272-8973 or e-mail us at
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