Employee. proof. Stock Ownership Plans. proof. proof

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1 P l a n n i n g Y o u r B e n e f i t s Employee Stock Ownership Plans

2 For some companies, it s the corporate and personal tax advantages. For others, it s the productivity boost that being given a piece of the action can deliver. Both are strong reasons to consider an Employee Stock Ownership Plan. An ESOP isn t right for every company, but it may be right for yours. And it s certainly worth knowing about. ntax-qualifiedn Benefit In simplest terms, an ESOP is a taxqualified employee benefit (retirement) plan that is designed to invest primarily in stock or other securities issued by the employer. Usually, an ESOP is a stock bonus plan, or a stock bonus plan coupled with a moneypurchase-type plan (requiring fixed contributions). When you start an ESOP, you can decide whether you want to tie your plan contributions to your profits. To qualify for favorable tax treatment, an ESOP needs to satisfy specific tax law requirements. If it does, your company will gain tax deductions and other benefits. Your employees will receive tax-deferred benefits and be motivated to help your company prosper.

3 How an nesop Worksn An ESOP must be custom designed to fit a company s situation and needs. So, each plan operates somewhat differently. Typically, however, an ESOP works like this: You the employer corporation set up your ESOP by adopting a written ESOP document that establishes the plan trust and by naming a plan trustee. uses company contributions to gradually pay both the interest and principal on the debt. A leveraged ESOP can supply a corporation with substantial working capital funded with tax-deductible dollars. Under the right circumstances, a leveraged ESOP can be a very practical financing resource for a company. Leveraged ESOP You then make tax-deductible contributions to the plan. Company The plan trustee uses the contributions to buy your company s stock. The trustee holds the stock for the benefit of your participating employees. ESOP Contributions $ Payment for Stock $ When employees retire (or in certain other circumstances), the trustee makes distributions to the employees from the plan. The distributions may consist of your company s stock or, under certain circumstances, an equivalent amount of cash. An ESOP may be set up so that employer contributions provide the funds for the plan s stock purchases. Or you can use a debt-financed leveraged form of ESOP. With a leveraged ESOP, the trustee or plan sponsor borrows money from a lender. The borrowed funds are used to acquire stock from the company. In turn, the trustee Stock Stock Acquisition $ Lender ESOP Repayment $

4 nyour ESOPn Benefits With an ESOP, your company will have: Improved employee morale and involvement An ESOP can be a means to improve quality. Once employees know that their contribution to company profits can result in an addition to their own plan accounts, measurable productivity gains generally follow. Improved morale can also reduce turnover, and the availability of an ESOP can aid in hiring desirable employees. The ability to make tax-deductible plan contributions As long as your plan is tax-qualified, you can deduct your company contributions on a current basis, within the tax law s limits. Other tax advantages Dividend Deductions If your company is a regular C corporation, it may also deduct any dividends on ESOP-held stock that the ESOP distributes currently to the employees who participate in the plan (or that the ESOP uses to pay off the loans that financed its stock purchases). You may also deduct dividends that participants elect to leave in the plan for reinvestment in employer securities. Deductions for Loan Repayments In addition to annual plan contributions, employers that sponsor leveraged ESOPs generally can deduct repayments of principal and interest on loans used to acquire employer securities. (Certain tax law limits apply.) However, the deduction for loan repayments is not available to an S corporation. Tax- deferred Rollovers Owners may be able to roll over the proceeds of the securities they sell to the ESOP into other qualifying securities without recognizing a gain on the sale, provided certain requirements are met. Added stock liquidity If you are a closely held corporation, your ESOP can ensure a market for your stock. Acquisition and merger assistance A closely held corporation may also use its ESOP to help (or hinder) prospective acquisitions or mergers. nyour Employees n ESOP Benefits Beyond the definite advantages to your company, setting up an ESOP offers these distinct benefits to your employees as well:

5 An ownership interest An ESOP makes your employees part owners of your company. So, they will benefit from any appreciation in your company s value. An effective personal tax shelter Your contributions to the plan are not includable in an employee s taxable income until benefits are withdrawn from the plan. If the contributions were paid instead as a simple bonus, each employee s share would be heavily reduced by income tax. In turn, this would markedly decrease the opportunity to build a larger retirement fund. Favorable tax treatment for plan benefits When an employee does receive benefits from the plan, he or she may be entitled to favorable tax treatment for those benefits. nwe Cann Help Is an ESOP right for your business? There s no standard answer. Any decision must take into consideration among other factors your profitability, size, and ability or willingness to regularly make plan contributions. It s your decision whether an ESOP should be part of your company s employee benefits package. But we can give you input toward your answer. Moreover, if you choose to set up an ESOP, we can help you design and implement it. We have experience in helping plans meet pension and tax law requirements, and we can also take care of much of the plan s administration for you. For example, we can arrange for: Receiving your plan contributions and holding the plan assets for the benefit of the participating employees Handling all security transactions for the plan Making all benefit payments, either in stock or cash as your plan provides, to the participants or their beneficiaries Maintaining all records on the plan assets. We can also handle most of the administrative side of your plan for you by: Maintaining your participant records Preparing your government reports Making all required disclosures to your participants Providing periodic account statements to your company and to your individual employee participants Ensuring that your plan operates in compliance with the requirements of the pension law Communicating the benefits of plan participation to your employees.

6 nninnn Sum An ESOP has the potential to offer your company significant cash flow and tax advantages. An ESOP can improve morale and lead to greater productivity. With an ESOP, your employees obtain personal tax advantages and an opportunity for a more secure retirement. And, with our expert assistance, plan implementation and administration are greatly simplified. Would you like to know more about a tax-qualified Employee Stock Ownership Plan? We d be happy to assist. Please contact us soon. Copyright 1993, 1996, 1998, 2001, 2003, 2004 by NPI4:6 (1/04)