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ESOP (Employee Stock Ownership Plan) is a retirement plan that offers all ESOP employees the opportunity to have an equity stake in the company without any financial investment.
A simple explanation is this:
Heartland Dental Care sold a portion of our company to an ESOP. An independent trustee, Northstar, will oversee the plan. Annual allocations of stock will be made to the ESOP employee through the trustee. The value of their retirement plan, or nest egg, will be based on the value of the company. ESOP employees will receive the value of the stock (in cash) when that employee leaves. The end result is a wonderful nest egg for their retirement!
The below Q&A section will hopefully offer a better understanding of the ESOP and how it impacts ESOP employees.
What is an ESOP?
ESOP stands for Employee Stock Ownership Plan. It is a retirement plan that holds the company stock, much like a trust fund. It is regulated by the IRS and the Department of Labor. It also is independently appraised annually. The trustee (Northstar) oversees the administration of the plan.
We worked with a capital investment firm to find the maximum value of our company. With their help, we were able to carve out 72 offices which they felt would provide the highest valuation.
How does the ESOP work?
We secured a loan for the ESOP to purchase approximately 27% of these 72 practices. As this debt gets paid down, shares are allocated to all shareholders. Shareholders are all benefit eligible employees of an ESOP practice who were employed as of Dec. 31, 2003.
How do ESOP employees benefit from the ESOP?
Economic benefit is based on the company’s performance. The more profits that are generated, the greater the contributions to the ESOP employees retirement. ESOP employees can increase benefits by continuing to grow their practices. Our goal is to transfer 100% of the ownership to the employees.
When do ESOP employees actually get the benefits ($$)?
The amount of payout will be based on the number of shares that have been allocated to their retirement account and the stock value at that time. Vesting is a process where ESOP employees gain more ownership of their shares after specific years of service. The ESOP has a 7-year graduated vesting schedule. After 3 years of service, they will be 20% vested; 4 yrs/40%; 5 yrs/60%; 6 yrs/80%; 7 yrs/100%. If an ESOP employee leaves the company before they are fully vested, the amount of payout and when it will be received will be determined by the distribution regulations established by the ESOP.
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