How Can You Make Withdrawals From ESOP Investments?
An employee stock ownership plan, commonly referred to as an ESOP, is a company-funded retirement plan for employees in which the company places shares of its stock into an account for the benefit of the employee. As an employee, you may be able to buy company stock to place in your ESOP account, or the company can give you stock as a bonus or through a profit-sharing plan. Much like a 401(k), there are tax implications and rules regarding how you can make withdrawals from ESOP investments.
Benefits of ESOP
Employees of a company that offers an ESOP plan are typically able to participate as long as they are over 21 years old and meet the employment criteria of the plan. Company contributions to your ESOP plan are typically made based on your rate of pay, with company-contributed shares vesting -- meaning you own the shares fully -- within two to six years of continuous service time with the company. You will not be taxed on the stock that is allocated to your account until you take a distribution.
If you have participated in your company's plan for 10 years or more and are at least 55 years of age, you are legally allowed to diversify a portion of your stock into other investments. Your company's ESOP must offer at least three alternative investments from which you can choose, either within the ESOP or within a comparable retirement vehicle such as a 401(k), or the ESOP must distribute your diversification portion to you directly in the form of cash or stock that you can invest in another retirement account independently of your ESOP.
Should you lose your job, there are a few options as to what you can do with your ESOP plan. The first would be to liquidate the vested shares within your plan, either as stock, which you can hold or liquidate on the open market, or in a lump sum of cash. Any portion of your plan that is not vested would return to the company. The other option would be to roll over the stock or proceeds from the sale of the stock to an IRA or other investment account. Either option may have tax implications.
Under the rules of ESOP plans, distribution automatically begins on April 1 of the first year after you reach 70 1/2 years of age. If you retire early, distribution must begin within six years of your retirement date, with payouts being paid over a span of five years. If you pass away or become disabled before beginning to receive payments from your ESOP, the plan must begin distribution to you or your heirs the following year.
- U.S. Securities and Exchange Commission: Employee Stock Ownership Plans
- National Center for Employee Ownership: How an Employee Stock Ownership Plan Works
- National Center for Employee Ownership: ESOP Vesting, Distribution and Diversification Rules
- Bingham, Osborn and Scarborough: Employee Stock Ownership Plans (PDF)
- National Center for Employee Ownership: The ESOP Participant's Guide to ESOP Distribution Rules
Chris Baylor has been writing about various topics, focusing primarily on woodworking, since 2006. You can see his work in publications such as "Consumer's Digest," where he wrote the 2009 Best Buys for Power Tools and the 2013 Best Buys for Pressure Washers.