Differentiating ESOPs and ESPPs
Dissecting Unique Facets of Employee Ownership
There are two popular options for company stock ownership — Employee Stock Ownership Plans (ESOPs) and Employee Stock Purchase Plans (ESPP). Although they sound similar, in practice they are quite different, according to a recent post from Kevin Mercadante.
ESOP: Designed to transfer the ownership of a company to the employees. In simple terms, they often serve as an alternative retirement account. Stock is granted to employees based on certain factors like the duration of their employment.
ESPP: An Employee Stock Purchase Plan can either be a qualified or a non-qualified plan. A qualified plan requires the approval of company shareholders with the offering period being three years or less and the maximum share price is limited. A non-qualified ESPP has fewer restrictions but does not have tax advantages.
ESOP: Function as a trust fund where companies contribute cash to purchase company stock, provide shares directly, or arrange for the plan to borrow funds to acquire shares. Although different from 401(k)s, ESOPs are governed by some of the same laws and regulations. An employee usually receives distributions from an Employee Stock Ownership Plan upon retirement, resignation, termination, or death. Once this happens, the portion of the plan is dispersed to the employee in the form of cash.
ESPP: Employers provide the opportunity for eligible employees to purchase company stock at a discounted rate (up to 15%) on a designated date. These employees contribute after-tax income to a fund that is later used to acquire the stock when it becomes available for sale. Depending on the plan, employees can sell the stock for immediate profit or choose to hold onto it.
ESOPs: A Washington State study found that ESOP participants had higher sales and employment growth when compared to other sorts of companies. Studies have shown ESOPs contribution to an increase in employee engagement. Employees become personally invested in the success of the company which leads to more employee engagement and enthusiasm when it comes to tackling problems.
ESPP: Most obvious, ESPPs allow employees to purchase company stock for a discounted price that can be as much as 15 percent in certain cases. Depending on the country and the plan, there may also be tax advantages. Similar to ESOPs, owning shares in the company can also foster a more engaging work environment. However, like ordinary stock investments ESPPs have lock up periods and market risks but can still be beneficial.