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 Ohio, as in other states, an Employee Stock Ownership Plan (ESOP) is a retirement plan that allows employees to benefit from the ownership of company stock. The ESOP is a qualified defined contribution plan under section 401(a) of the Internal Revenue Code (IRC), which means it receives favorable tax treatment. The plan is designed to invest primarily in the securities of the sponsoring employer, and the shares in the plan vest over time according to a schedule set by the plan documents. The IRS and the Department of Labor (DOL) oversee ESOPs to ensure they comply with federal laws and regulations, including those that protect the interests of the employees. When an employee leaves the company due to termination, retirement, disability, or death, the ESOP distributes the vested shares in the employee's account. It's important to distinguish ESOPs from employee stock option plans, which are different in that they provide employees with the right to purchase company stock at a predetermined price, rather than contributing stock to a retirement plan. Ohio does not have specific state statutes governing ESOPs, so the federal regulations primarily guide the establishment and operation of ESOPs in the state.