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Allocation of Leveraged ESOP Stock

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Facts/assumptions as follows.

Client owns an S-Corp and sets up an S-ESOP with 20 eligible participants/employees. Value of S-ESOP stock is $20k when sold to ESOP Trust and loan is established to be paid off within 5 years.  100k shares outstanding.  Assume 6 yr step vesting.  ESOP Loan paid off by yr 3.

TPA informs me that stock is allocated proportionately to payoff of ESOP loan.  By yr 4 all of the 100k stock has already been allocated to the above-referenced 20 participants.

Q: What happens when 3 new employees begin work in yr 4 and begin to vest by yr 6?

Q:  How do you properly allocate shares/benefit to new employees?  Is TPA correct?

I'm informed by the TPA that the only way to provide a benefit to the 3 new employees  is if - and when - the original 20 ee's retire/leave and then forfeit their allocated stock shares.  At such time those retired shares (proper terminology?) can be allocated to the 3 new ee's.

Can Plan Sponsor issue additional stock for allocation?  or is the TPA correct?  I can't seem to find guidance

on this matter.  Thoughts, comments and resources would be much appreciated.

Thank you!




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Wow there is a lot in there!  I can only talk as general rules as so many facts are left out and with all retirement law there are exceptions to just about any statement. And in ESOP rules those exceptions seem to be more than many other areas.

As a general rule the TPA sounds correct.  If they paid the loan off early all the shares will have been allocated.  They are released as the loan is paid. 

You now have the classic have/have not problem in this ESOP.

I know it doesn't help now but someone should have been talking to the company before now.  This was very predictable and could have been avoided.

Yes, the most common way to get shares to the new people is to wait until someone terminates and recycle those shares.  

There are OTHER ways to get shares to the new employees besides new shares.   You can do what is known as reshuffling IF YOUR PLAN DOCUMENT ALLOWS FOR IT.  In reshuflling you adjust everyone's balances so everyone has the same ratio of cash and share every year.  For example if the ESOP assets are 90% company stock and 10% cash everyone's balance would be 90% stock and 10% cash.   This isn't popular with the people who currently own all the stock if the price is going up.  You are forcing them to sell stock for cash in their account.  However, it will mean everyone has some stock in their account if that is important to management.

Adding new shares to the plan is possible but there can be issues. If the ESOP owns 100% of the stock adding shares outstanding is going to put downward pressure on the share price for example. 

Is the TPA that does the work one that specializes in ESOPs or is it mostly a 4k shop that does a few ESOPs?  At the risk of sounding like a snob but ESOPs need the focus of a specialized firm.  It sounds like the current TPA is getting the allocations right but it doesn't sound like they are in a place that can help the client plan and look forward.  Also, there is so much more to ESOPs than allocations and firms that don't specialize in ESOPs often times miss those rules.  If you want to private message me I can put you into contact with people in our business development group as our firm specializes in ESOPs.  I am not putting a hard press here as this board is one that frowns on selling your services on it. 

I would also recommend people in this situation look to organizations like the NCEO.


I would recommend they join and look to their publications and articles on the topic of "mature ESOPs" which will talk about how to solve the have/have not problem. 

Also, if the timing isn't such you have to have solutions by 12/31/2018 I would strongly recommend some of the people involved go to the NCEO spring conference in Pittsburgh.  It is one of the best conferences for ESOPs in the country.  There will be multiple breakout sessions where they can learn more about these issues. 

If people don't have time to go to conferences for most of the year the NCEO has one hour webinars that are very good also.  They are around lunch time in most time zones.  It is a still morning on the west coast.  They are free to members.  (Maybe I should ask for a commission from the NCEO if people becoming members after this.  ?

You can also look to the ESOP Association for resources.  https://www.esopassociation.org/about-the-association

The great thing about the ESOP Assoc is they have chapters around the country that put on smaller conferences all though the year.  Since the chapter conferences are across the country they don't require as much travel.  The chapter conferences tend to be very high quality.   The one I am on the Executive Committee for gets great reviews for our breakout sessions.   So find the chapter in your area and start to reach out to them and go to their conferences. 

Hope that helps. 

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