The ESOP benefits employees as company contributions are made annually to the ESOP, as both cash and stock. ESOP benefits are allocated to the accounts of participating employees in the trust established as part of the ESOP. The accumulated balance in a participant’s account is distributed to the participants after his or her retirement or other termination of employment with the company.
So long as a participant’s account remains in the ESOP trust, the value of the ESOP benefits account including the appreciation in stock value is not taxable to the employee.
Employees age 55 or older with 10 or more years of participation in the ESOP must be allowed to diversify a portion of their ESOP benefits accounts.
ESOP financing permits the repayment of acquisition debt with pre-tax dollars. This favorable tax treatment means that ESOPs are effective vehicles for financing management buyouts.