An employee stock ownership plan (ESOP) is a retirement plan in which an employer contributes its stock (or money to buy its stock) to the plan for the benefit of the company’s employees. The plan maintains an account for each employee participating in the plan. Shares of stock vest over time before an employee is entitled to them. With an ESOP, an employee never buys or holds the stock directly while still employed with the company. If an employee is terminated, retires, becomes disabled, or dies, the plan will distribute the shares of stock in the employee’s account. This type of plan should not be confused with employee stock option plans, which give employees the right to buy their company’s stock at a set price after a certain period of time.

An ESOP is a qualified defined contribution plan—under Internal Revenue Code (IRC) section 401(a)—that is a stock bonus plan or a stock bonus/money purchase plan. See 26 U.S.C. §401(a). An ESOP must be designed to invest primarily in qualifying employer securities—as defined by IRC section 4975(e)(8)—and meet certain requirements of the IRC and applicable regulations. The Internal Revenue Service (IRS) and the Department of Labor (DOL) share jurisdiction over some ESOP features.

In Arizona, as in all states, an Employee Stock Ownership Plan (ESOP) is regulated by federal law, specifically under the Internal Revenue Code (IRC) section 401(a) and other applicable regulations. ESOPs are qualified defined contribution retirement plans that allow employers to contribute their own stock or funds to purchase such stock for the benefit of their employees. The shares in the ESOP vest over time and are held in individual employee accounts within the plan. Employees do not directly buy or hold the stock while employed. Upon termination, retirement, disability, or death, the ESOP distributes the vested shares to the employee or their beneficiaries. ESOPs must primarily invest in qualifying employer securities and comply with specific requirements of the IRC. Both the Internal Revenue Service (IRS) and the Department of Labor (DOL) have jurisdiction over ESOPs, ensuring they meet the necessary legal standards for operation and employee protection. It's important to note that ESOPs are distinct from employee stock option plans, which offer the right to purchase company stock at a predetermined price after a certain period.