Any discussion of ESOP Don’ts must address the issues of consequences. Lawsuits are an obvious risk but perhaps more importantly, ESOPs are regulated by two primary government agencies.

  • The Department of Labor (DOL) enforces the Employee Retirement Income Security Act (ERISA), which sets minimum standards for all employee retirement plans, including ESOPs. The DOL is responsible for ensuring that ESOPs are operated in a fair and equitable manner and that ESOP participants receive the benefits they are entitled to.
  • The Internal Revenue Service (IRS) enforces the Internal Revenue Code (IRC), which provides tax benefits for ESOPs. The IRS is responsible for ensuring that ESOPs meet the requirements of the IRC in order to qualify for these tax benefits.

In addition to the DOL and the IRS, ESOPs may also be subject to regulation by state securities regulators.

High-Level ESOP Cautions

Here are some ESOP don’ts and what gets you in trouble with regulators and participants:

Don’t rush into implementing an ESOP. ESOPs are complex and there is a lot to learn before implementing one. It is important to take the time to do your research and think through both the financial and emotional issues.

Don’t fail to educate your employees about the ESOP. Your employees need to understand how the ESOP works and how it can benefit them. It is important to provide them with clear and concise information about the ESOP and to answer their questions. Sharevance offers employee education that is paced through the process so everyone stays on the same page.

Don’t mismanage the ESOP. ESOPs are subject to strict regulations from the Department of Labor. It is important to manage the ESOP in accordance with these regulations to avoid penalties and other legal problems. Sharevance’s objective, third-party administration, adheres to regulatory and industry best practices.

Don’t use the ESOP to benefit yourself or a small group of insiders. ESOPs are intended to benefit all employees. It is important to use the ESOP in a fair and equitable manner. As a third-party administrator, Sharevance impartially administers the ESOP Plan and ensures that the ESOP Trust passes all Department of Labor discrimination tests.

Top 4 ESOP Don’ts

Here are some specific examples of what can get you in trouble with an ESOP:

  1. Failing to pay ESOP participants their distributions on time. ESOP participants are entitled to receive distributions from their ESOP accounts on a regular basis. Failing to pay these distributions on time can result in penalties and other legal problems. On the Sharevance platform, distributions are easily scheduled well in advance of deadlines.
  2. Charging ESOP participants excessive fees. There are a number of fees associated with ESOPs. It is important to charge ESOP participants fair and reasonable fees. Charging excessive fees can result in legal problems and can also erode the value of the ESOP for participants. Sharevance leverages technology to allow for cost-effective administration free of excessive fees.
  3. Using the ESOP to prop up the value of the company’s stock. ESOPs are not intended to be used to prop up the value of the company’s stock. Doing so can violate ESOP regulations and can also result in financial losses for ESOP participants.
  4. Self-dealing. ESOP trustees and other fiduciaries have a fiduciary duty to act in the best interests of ESOP participants. Engaging in self-dealing, such as using the ESOP to benefit yourself or a small group of insiders, can result in legal problems and can also erode the value of the ESOP for participants. Sharevance acts as an unbiased, third-party administrator, avoiding this risk entirely.

If you are considering implementing an ESOP in your business, it is important to be aware of the potential pitfalls and how partnering with Sharevance mitigates many risks.