A Leveraged Employee Stock Ownership Plan (ESOP) is a type of employee benefit plan that allows employees to acquire ownership in the company they work for. It combines elements of an ESOP and leverage, which means the plan borrows funds to finance the purchase of company shares on behalf of the employees.
Here's how a leverage ESOP typically works:
- The company sets up an ESOP trust and borrows money from a lender, such as a bank or financial institution.
- The borrowed funds are used to purchase company shares, either from existing shareholders or newly issued shares.
- The ESOP trust holds the shares on behalf of the employees.
- The company makes annual contributions to the ESOP trust to repay the borrowed funds. These contributions are usually tax-deductible for the company.
- The ESOP trust allocates the shares to individual employee accounts based on a predetermined formula, such as proportionate to salary or length of service.
- Employees become beneficial owners of the shares in their accounts. However, they usually cannot sell or transfer the shares until they leave the company or meet specific conditions set by the plan.
- When employees retire, leave the company, or meet certain trigger events, they can sell their shares back to the ESOP trust or the company. The funds from the sale are distributed to the employees.
A leverage ESOP allows employees to accumulate ownership in the company gradually, often as a retirement benefit. It provides a way for employees to share in the company's success and can also have tax advantages for both the company and the employees. However, it's important to note that the specifics of a leverage ESOP can vary depending on the company's structure, financing arrangements, and legal requirements.