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 Michigan, 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 the Employee Retirement Income Security Act (ERISA). ESOPs are considered qualified defined contribution plans that primarily invest in the securities of the sponsoring employer. The plan provides for the allocation of company stock to employees' accounts, which vests over time. Upon termination, retirement, disability, or death, the employee or their beneficiary receives the vested stock. The IRS oversees the tax aspects of ESOPs, ensuring they meet specific requirements for tax-favored status, while the Department of Labor (DOL) ensures compliance with ERISA's standards for fiduciary conduct, reporting, and disclosure. Michigan state law does not specifically govern the operation of ESOPs, as they are subject to federal jurisdiction; however, state laws regarding corporations and employment may indirectly affect how ESOPs are managed within the state.