How Do We Get Our ESOP Plan Started?

Q: My company wants to start an employee stock ownership plan, or ESOP, that defines a vesting year as being an actively employed participant on Dec. 31 of that year and you credited with at least 1,000 hours of employment. Should this include regular hours, overtime hours, and PTO hours? What else might we need to consider?

— ESOP Fable, financial/insurance/real estate, Des Moines, Iowa employee stock ownership plan

A: Yes, all of those hours should be included in determining whether employees meet the 1,000 hours of service requirement. For purposes of employee stock ownership plan, or ESOP, an “hour of serve” is any hour for which an employee is directly or indirectly paid or entitled to payment by the employer. You are not required to include years of service prior to the adoption of the ESOP, but many companies choose to do so. That may be as simple as counting all years of service or giving partial credit for prior years (such as one year of ESOP vesting credit for each three years of service prior to the ESOP).

You may also want to consider adopting a vesting schedule that is faster than required by law. Participants must vest no later than the either of the standard vesting schedules. One schedule (“cliff vesting”) allows no vesting for the first five years of service, then 100 percent vesting at the end of the fifth year. A second schedule allows graduated vesting to begin at 20 percent after the second year and increase 20 percent per year thereafter. A number of companies choose to provide for faster vesting because they want employees to start feeling an ownership interest more quickly than the standard schedules.

You may also want to consider providing for full vesting upon disability, death, or reaching the early retirement age specified under the plan. See IRS Code Section 410(a)(3)C) and Labor Reg. 2530.200b-2(a)

SOURCE: Loren Rodgers, executive director, National Center for Employee Ownership, Oakland, California, June 12, 2014.