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.)
|
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