What is the difference between and EIAP and an ESOP?

[Guest death and taxes]

I recently head someone say that an individual account plan (EIAP) is a cheaper alternative to a traditional ESOP. I thought an EIAP included ESOPs. How are they different?

[RLL]

An EIAP is an "eligible individual account plan" under ERISA section 407(d)(3). An EIAP is exempt from ERISA's general diversification of investments requirement and the normal 10% limit with respect to investments in qualifying employer securities or qualifying employer real property. An EIAP can be an ESOP, a non-ESOP stock bonus plan or a profit sharing plan and must specifically provide for the percentage of plan assets that may be invested in such employer securities or employer real property.

There are a number of special tax incentives and other features available only to ESOPs and NOT to other types of EIAPs. These include the ability to "leverage" the purchase of employer stock (using the employer's credit), higher limits on tax deductibility of employer contributions, tax deferred sales of stock (by shareholders) under IRC section 1042, tax deductibility of dividends (on employer stock) used to pay ESOP debt or "passed-thru" to participants, tax exemption for an ESOP's share of employer S corporation earnings, and greater flexibility in modifying benefit distribution options. There are also certain special qualification requirements applicable only to ESOPs under IRC section 4975(e)(7).

There are many situations where a non-ESOP EIAP may accomplish the sharing of stock ownership with employees just as well as an ESOP. On the other hand, the special tax benefits available only to ESOPs are often very significant. Whether an ESOP is the appropriate vehicle in a particular situation depends on facts and circumstances, including the design and objectives of the program.

I recommend that you get more information on this subject from the National Center for Employee Ownership at http://www.nceo.org and from The ESOP Association at http://www.esopassociation.org and from the Foundation for Enterprise Development at http://www.fed.org .

[Guest death and taxes]

Thanks for your response--and at 1:53 a.m. even! I just learned that an LLC cannot sponsor an ESOP. Can they sponsor a PS EIAP and hold employer "stock"?

[RLL]

An LLC does not issue "stock" to represent its ownership interests. With the limited exception of certain publicly-traded entities, LLC membership interests (which are similar to limited partnership interests) would be employer securities which are NOT "qualifying employer securities" that can be held by an EIAP under ERISA section 407.