| Frequently Asked Questions About ESOPs
Please click on a question below to be directed to the answer.
ESOPs are unlike other employee benefit plans, which typically diversify their holdings by investing in a variety of assets.
An ESOP is a retirement plan that is designed to provide employees with an ownership interest in the company for which they work by investing primarily in stock of the employer.
The ESOP is funded with tax-deductible contributions by the employer, which can be in the form of company stock, or in cash which is used to purchase company stock.
An ESOP operates through a trust, under the direction of a trustee or other named fiduciary (See Questions 8 and 9).
To be an ESOP, the plan must be specifically designated as an ESOP in the plan document, and must comply with special ESOP requirements of the Internal Revenue Service (“IRS”).
An ESOP is a technique of corporate finance as well as an employee benefit plan.
An ESOP can be used to raise new equity capital, to refinance outstanding debt, or to acquire productive assets using cash borrowed from third-party lenders.
ESOPs can also be used to increase cash flow by making plan contributions in stock instead of cash.
Since contributions to the ESOP are fully tax-deductible, an employer can fund both the principal and the interest payments on an ESOP’s debt service with pre-tax dollars.
Dividends on ESOP stock are tax-deductible if they are applied to repay ESOP loan principal the proceeds of which were used to acquire the employer securities with respect to which the dividends were paid.
Reducing loan principal with pre-tax contributions and dividends generates significant tax savings, which in turn increases the ESOP company’s cash flow.
There is strong statistical evidence that employee ownership improves employee morale and productivity and reduces turnover.
Surveys conducted by The ESOP Association show that most Association members report improved employee morale and productivity due to their ESOPs.
A study by the
One of the most popular uses for an ESOP is to provide a ready market for some or all of the shares owned by shareholders in a closely held company.
With an ESOP in place, a majority or controlling shareholder has an exit strategy when he or she is ready to retire.
Likewise, an ESOP is often the only market for a minority shareholder in a closely held company.
The ESOP rollover described in Question 24 permits a shareholder to sell stock to an ESOP and defer capital gains taxes.
This option can also be used to obtain estate planning benefits.
With an ESOP, a majority shareholder has the option of selling all or only a portion of his or her stock to increase personal liquidity while maintaining control of the company.
Each year company contributions to the ESOP, both cash and stock, are allocated to the accounts of participating employees in the trust established as part of the ESOP.
The accumulated balance in a participant’s account is distributed to the participant after his or her retirement or other termination of employment with the company (See Question 40).
So long as a participant’s account remains in the ESOP trust, the value of the account-- including the appreciation in stock value-- is not taxable to the employee.
Employees age 55 or older with 10 or more years of participation in the ESOP must be allowed to diversify a portion of their ESOP accounts (See Question 36).
ESOP financing permits the repayment of acquisition debt with pre-tax dollars.
This favorable tax treatment means that ESOPs are effective vehicles for financing management buyouts.
Yes, but the amount of contributions to the other plan is usually reduced.
If the company maintains a 401(k) plan, it may be possible to increase its cash flow by using stock instead of cash to match employee contributions to the 401(k) plan.
ESOPs operate successfully in a broad range of companies - large and small, public and private.
The ideal private company candidate for an ESOP will meet most of the following criteria:
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The company has strong cash flow, and a history of increasing sales and profits.
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The company has consistently been in a high federal income tax bracket.
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The company has substantial stockholder equity.
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The company has capable second-line management in place.
An ESOP is leveraged if it borrows money to purchase shares of the employer's stock.
The loan may be from a bank or financial institution, or the selling shareholder may finance the transaction by taking back a note for part or all of the purchase price.
The ESOP loan is usually secured by assets of the sponsor company.
In some cases, the selling shareholder may be required to guarantee the loan or provide security for its repayment.
An ESOP is the only kind of employee benefit plan that can use the credit of the company and its shareholders to finance the purchase of company stock.
For all other qualified employee benefit plans, this would be a prohibited transaction under the Employee Retirement Income Security Act of 1974, as amended ("ERISA")
(See Question 43).
Most ESOPs used for ownership transition purposes are designed as leveraged ESOPs, although non-leveraged ESOPs can also be structured to provide significant tax benefits in connection with corporate acquisitions and divestitures.
Any person with discretion over the management or administration of a plan, or who exercises any authority or control over plans assets, is a fiduciary under ERISA.
The ESOP trustee, or any other person or committee designated in the plan documents as responsible for making investments in company stock, is a “named fiduciary."
ERISA requires that plan fiduciaries act prudently and solely in the interest of plan participants.
Three of the most important responsibilities of an ESOP fiduciary are:
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Securing a proper valuation of the stock;
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Assuring that the interests of plan participants are protected in ESOP transactions; and
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Approving all purchases and sales of ESOP stock.
The company's board of directors may appoint a trustee or trustees who make decisions about the ESOP’s investment in company stock.
The ESOP trustee(s) could be officers or employees of the company, an independent bank or trust company, or disinterested individuals.
It is not uncommon for an ESOP trustee to be directed by an individual, committee or other named fiduciary identified in the ESOP plan document.
In these cases, the named fiduciary will be primarily responsible for fulfilling the fiduciary responsibilities discussed in Question 8.
The best way to accomplish this is to sell only a minority interest in the company to the ESOP.
In addition, a shareholder may participate in the administration of the ESOP, subject to the fiduciary requirements discussed in Questions 8 and 9.
Costs are a function of the complexity of the transaction.
If owners take the time to get a better understanding of ESOPs, initial costs can be reduced.
Ongoing ESOP administrative expenses are similar to most profit sharing plans, with the exception of the annual valuation update needed to value company stock held in the ESOP.
Yes.
Effective January 1, 1998 it became advantageous for an ESOP to be a shareholder of an S corporation under the federal tax laws.
To the extent that the S corporation is owned by an ESOP,
no federal income taxes on corporate income are payable by either the shareholder or the company.
This can create a significant competitive advantage for S corporations which are substantially ESOP owned.
However, S corporation ESOPs are subject to certain limitations and restrictions described in detail in Question 33.
The first step in the process is determining the company's value, since the ESOP cannot pay more than fair market value for the stock it purchases.
Both the IRS and the U.S. Department of Labor ("DOL") have issued guidelines governing the valuation of company stock in ESOP transactions.
The next step is a feasibility study to analyze the overall framework for the transaction.
Among the issues the study should address are: how much the company can afford to contribute to the ESOP each year; whether part of the contribution cost can be offset by eliminating other benefit programs; how the ESOP will affect the company's earnings and cash flow; how the transaction will be structured; and how it will be financed.
If a leveraged ESOP is established, a loan must be secured to finance the stock purchase transaction.
Financing an ESOP transaction can be difficult if the lender is not familiar with ESOPs.
If the seller finances the purchase transaction the company’s costs will likely be reduced.
Once financing has been arranged, legal counsel should prepare the ESOP plan documents.
An ESOP sponsor has many choices to make in designing a plan that will work well in its own corporate culture.
For that reason, it is advisable to work with experienced ESOP counsel in designing the ESOP.
The next step is to negotiate a stock purchase agreement between the ESOP fiduciary and the selling shareholder(s).
The stock purchase agreement sets forth the price and other terms and conditions under which the ESOP will purchase stock from the selling shareholder(s).
As in any stock purchase transaction, the stock purchase agreement typically contains representations and warranties about the company’s assets, operations and financial condition.
The final step before closing the transaction is an opinion from an independent appraiser described in detail in Question 22.
This opinion is required under DOL proposed regulations, and provides the necessary assurance that the ESOP is not paying more than fair market value for the company stock it purchases.
In some cases the appraiser will also be asked to give an opinion that the transaction as a whole is fair to the ESOP from a financial point of view.
No.
It is not a legal requirement for the IRS to approve the plan prior to setting up the ESOP or having the ESOP acquire company stock, nor is it necessary to file the ESOP with any governmental agency.
However, as with any tax-qualified retirement plan, ESOP companies usually submit their ESOP to the IRS with a request for a determination letter which confirms that the form of the ESOP satisfies the requirements of the Internal Revenue Code (“Code”).
No.
However, in order to satisfy IRS nondiscrimination guidelines, the ESOP must cover a substantial percentage of non-highly compensated employees who have attained age 21 and completed a year of service.
For this reason, ESOPs established by smaller companies usually cover all employees who have satisfied these minimum age and service requirements.
As with all tax-qualified retirement plans, ESOPs must comply with one of two minimum vesting schedules established in the Code.
In a "cliff vesting" plan, a participant must be 100 percent vested after five years, but need not be vested at all before that time.
In a "graded vesting" plan, a participant must become 20 percent vested after three years and the vested percentage must increase 20 percent annually thereafter until 100 percent vesting is reached after seven years.
Effective in 2007, the graded vesting period changes to six years and the cliff vesting alternative becomes three years.
A vesting schedule which provides for more rapid vesting than these minimums is permitted.
Participants must become fully vested when they reach normal retirement age, as defined in the ESOP.
Vesting is normally calculated using years of service with the employer, including service with affiliated employers within a “controlled group.”
Credit for service before the ESOP was adopted may (but need not) be recognized by the ESOP.
When a participant who is not fully vested leaves the company, his vested interest will eventually become a forfeiture and be reallocated among the remaining ESOP participants.
Yes.
Although this is not common, it is not prohibited.
An ESOP must include a definite formula for allocating employer contributions and forfeitures annually to the individual accounts of plan participants.
Usually, employer contributions to an ESOP are allocated among the participants' accounts in the plan based on their compensation from the company during the plan year.
However, the allocation can also be based on a combination of compensation and years of service with the company.
The latter option is more complicated to administer because of IRS rules designed to prohibit discrimination in favor of the highly compensated.
There is a ceiling on the amount of annual compensation that can be recognized for determining participant allocations in ESOPs and other tax-qualified retirement plans.
The ceiling is set at $220,000 for plan years beginning in 2006, with future adjustments based on cost of living increases.
For calendar 2006, an employee who is compensated at an annual rate of $350,000 will receive the same allocation within the ESOP as an employee who earns $220,000.
The Code also imposes limits on the maximum “annual additions” to a participant’s ESOP account.
Annual additions consist of the participant’s allocated share of the company’s contribution and any forfeitures (See Question 16).
For 2006, the maximum annual addition is the lesser of $44,000 or 100% of a participant’s compensation from the employer.
For leveraged ESOPs which satisfy a special nondiscrimination test, interest paid on the ESOP loan and forfeitures do not count as an annual addition.
A leveraged ESOP may also use the fair market value of the company stock released from the expense account (See Section 19) to determine the maximum annual additions to participants’ accounts.
Shares acquired by a leveraged ESOP are initially held in an unallocated suspense account within the ESOP.
As the loan is paid down, the shares are released from the suspense account and allocated among participants as described in Question 18.
The release from suspense must satisfy one of two alternative formulas specified in IRS regulations, which require release in proportion to either (i) principal paid on the loan for the year, or (ii) total principal and interest paid on the loan for the year.
Dividends on shares held in a leveraged ESOP may also be used to pay down the loan.
In that case, company stock equal in value to the dividends paid on the allocated shares in each participant’s account must first be allocated from the released shares before the remaining shares released from suspense for the year are allocated.
Yes.
Refinancing existing corporate debt through an ESOP should improve after-tax cash flow.
The refinance is accomplished through a loan to the ESOP which uses the borrowed money to purchase newly issued stock from the company.
The company uses the cash to pay off the existing debt, which is thus replaced with ESOP debt.
After the refinancing, the company’s contributions used to pay the principal portion of the ESOP debt will be tax-deductible, whereas principal payments on the prior corporate debt were not.
No.
Just as a company can terminate a profit sharing plan, it can also terminate an ESOP. At that point, all participants must become 100 percent vested.
Benefit distributions from the ESOP are eligible to be rolled over into an IRA; ESOP distributions not rolled over are taxable, but may be eligible for special favorable tax treatment.
Valuation of company stock in the ESOP must be made by an independent appraiser annually, and any time the ESOP purchases company stock from the company or an employee, officer, director, or 10% or greater shareholder.
The DOL and IRS have issued guidance on the factors that must be taken into account when appraising a company, and who should do the valuation.
Basically, a qualified appraiser must (i) hold himself/herself out to the public as an appraiser or perform appraisals on a regular basis, and be qualified to make appraisals of the type of property being appraised; and (ii) be independent with respect to the company and other parties to the ESOP transaction.
The credibility the IRS or DOL attaches to the appraiser's conclusion of fair market value will be greatly influenced by their assessment of the expertise demonstrated
by the individual or firm doing the appraisal.
The same can be said for the independence of the appraiser.
In order to satisfy the independence criteria,
the valuation cannot be done by
:
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The taxpayer who maintains the ESOP
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A party to the transaction in which the ESOP acquired the property
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An employee of the taxpayer who maintains the ESOP
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An individual or firm regularly used by the taxpayer maintaining the ESOP who does not perform a majority of his or her appraisals for entities other than the taxpayer maintaining the ESOP.
Under ERISA, the legal responsibility for valuing ESOP stock rests with a named fiduciary who is responsible for fulfilling this trustee responsibility.
The named fiduciary must carefully select and monitor the performance of the ESOP appraiser.
If the independent appraiser's valuation is challenged, the fiduciary would look to the appraisal firm to defend its conclusion of value.
Shareholders of privately held companies who sell their stock to an ESOP can elect to defer federal income taxes on the gain from the sale, if the sale qualifies as a tax-free rollover under Section 1042 of the Code.
In order to qualify for the rollover, the ESOP must own at least 30 percent of the company's stock immediately after the sale, and the proceeds must be reinvested in "Qualified Replacement Property" within a 15-month period, beginning 3 months prior to the date of the sale.
The stock being sold to the ESOP must be common stock (or certain convertible preferred stock) with the greatest voting power and dividend rights.
In addition, the stock sold to the ESOP must have been acquired as an investment and not in an employment-related transfer, the seller must have owned the stock for at least 3 years, and the company must not be an S corporation.
The selling shareholder, any 25 percent or greater shareholder of the company, and certain family members, are generally prohibited from receiving allocations of stock acquired through a tax-free ESOP rollover.
A shareholder may elect to roll over all or any portion of the ESOP sale proceeds.
The company must agree to pay a penalty tax if the ESOP shares acquired through the rollover are sold or disposed of by the ESOP within 3 years after the date of sale.
The election must be filed with the selling shareholder’s federal income tax return.
Qualified replacement Property includes stock and bonds of most domestic operating companies which qualify under the rules of Section 1042 of the Code.
It does not include treasury bonds, treasury bills, municipal bonds or mutual funds.
The selling shareholder must sign an affidavit which identifies the Qualified Replacement Property, and file a copy with the IRS.
An experienced adviser familiar with the rollover rules should be consulted to make sure that replacement securities satisfy the requirements for Qualified Replacement Property.
Yes.
There is no limit on the number of shares that must be sold to the ESOP in a single transaction, so long as the requirements described in Questions 24 and 25 are met.
Yes.
However, the Qualified Replacement Property must be purchased within a 15-month period, beginning 3 months prior to the date of the sale.
If the note has not been fully paid by the time the Qualified Replacement Property must be purchased, the selling shareholder will have to use other funds to purchase enough Qualified Replacement Property to roll over the entire sale proceeds.
Seller-financed transactions can use floating rate notes (See Question 28) to avoid this problem.
During the first 12 months after the sale to the ESOP, the selling shareholder may use the proceeds to buy and sell securities as often as desired.
During this period, any gains over the purchase price for the securities are taxable.
When the selling shareholder has purchased the securities which constitute Qualified Replacement Property, the shareholder’s basis in the Qualified Replacement Property will equal the cost of the Qualified Replacement Property less the amount of gain not recognized.
In a subsequent sale or disposition of all or any portion of the Qualified Replacement Property, taxable gain will be recognized to the extent the selling price exceeds the shareholder’s basis as transferred to the Qualified Replacement Property.
Selling shareholders who desire to actively trade the securities in their portfolio can use “floating rate notes” to avoid the capital gain taxes that are incurred when Qualified Replacement Property is sold.
These long-term notes constitute Qualified Replacement Property and can be used as collateral for margin loans which are used to actively trade securities with a tax basis equal to the purchaser’s cost.
Dividend and interest income received from the Qualified Replacement Property is taxable.
If the selling shareholder holds the Qualified Replacement Property until death, his or her estate will receive a stepped up basis for the property, and no gain or loss will be recognized for income tax purposes.
Qualified Replacement Property owned by the decedent will, however, be included in the decedent's estate for federal estate tax purposes.
Charitable contributions of Qualified Replacement Property are tax-deductible under the Code and are not taxable dispositions under the ESOP rollover rules.
Qualified Replacement Property may also be contributed to a charitable remainder trust or annuity, which allows the donor to receive continuing income on a tax-advantaged basis, and removes the property from the donor's estate for estate tax purposes.
Charitable giving techniques can maximize the tax and financial benefits of an ESOP rollover.
Sponsors of leveraged ESOPs (except S corporations as discussed in Question 33) are allowed to deduct contributions of up to 25 percent of covered payroll annually to repay
principal
on the ESOP loan.
Interest payments on the ESOP loan do not count toward the 25 percent limit and are deductible without limitation.
Additional deductible contributions are permitted up to 25% of covered payroll for the sponsor’s contributions to other tax qualified retirement plans.
"Covered payroll" is defined as the total compensation of ESOP participants, excluding annual compensation to any participant in excess of the IRS ceiling
(See Question 18).
A special tax deduction is permitted for reasonable dividends on C corporation stock held in the ESOP if they are (i) used to repay an ESOP loan the proceeds of which were used to acquire the employer securities with respect to which the dividends were paid, (ii) distributed in cash to participants no later than 90 days after the close of the plan year in which they were paid, or (iii) paid to the plan and reinvested in company stock.
Distributed dividends are taxed as ordinary income.
Not for each year, although the IRS does require that “recurring” contributions must be made to a tax qualified retirement plan to maintain its qualified status.
However, in a leveraged ESOP, employer corporations need to commit to contribute enough cash each year to service the ESOP loan debt.
If the ESOP has sufficient cash to pay the ESOP debt, additional contributions are not required.
In some instances, it may be wise to make contributions in excess of the required ESOP debt payments to accumulate cash in the ESOP for years in which cash flow may be restricted.
A shareholder who sells S corporation stock to an ESOP is not eligible for the tax-free ESOP rollover described in Question 24 and the S corporation ESOP deduction limits are less favorable than the ESOP deductions available to C corporations.
S corporation ESOP deductions are limited to 25 percent of covered compensation annually including
both
principal and interest on an exempt loan.
In addition, corporate distributions to S corporation shareholders are not tax-deductible (See Question 31), and it may not be possible to defer distribution of S corporation shares acquired with a loan to participating employees who have left the company until the loan is repaid (See Question 40).
However, legislation adopted in 2004 confirms that S corporation dividends paid on allocated shares of S corporation stock can be applied to repay an ESOP loan, in which case company stock equal in value to the distributions must first be allocated from the released shares in the manner described in Question 19.
Severe tax penalties are imposed on S corporations which sponsor ESOPs in any year in which “disqualified persons” collectively own or are deemed to own 50% or more of the company.
A disqualified person is a person who (i) individually owns 10% or more of the company’s “deemed-owned shares”, or (ii) collectively with other family members owns 20% or more of its deemed-owned shares.
Deemed-owned shares include an individual’s allocated ESOP shares, a proportionate share of unallocated ESOP shares, and any “synthetic equity” owned by disqualified persons.
Synthetic equity is broadly defined to include certain cash deferred compensation plans, and any right to acquire company stock in the future or to share in the company’s value or growth through an equity-based compensation plan.
These rules are complex, but will generally preclude small S corporations with 10 or fewer employees from adopting an ESOP.
They will also require larger S corporations with as many as 50 or more employees to carefully monitor ESOP allocations, as well as their equity-based and deferred compensation programs.
The Code requires that company stock in the ESOP must have full voting rights.
In non-public ESOP companies, voting rights on shares allocated to ESOP accounts must be “passed through” to ESOP participants for votes on major corporate matters such as a merger or consolidation, recapitalization, reclassification, liquidation, dissolution, or sale of substantially all of the assets of the corporation.
Unallocated shares, and allocated shares voting on other matters (such as the election of the Board of Directors), may be voted by a named fiduciary, or as otherwise designated in the plan.
Some ESOPs pass through voting to participants on all matters, or provide for proportional voting for all shares held in the ESOP (both allocated and unallocated shares) on the basis of one vote per participant.
The value of a participating employee's ESOP account, including company contributions and any appreciation in the value of the account, is not taxable to the employee while it accumulates in the ESOP.
Distributions from the ESOP are subject to taxation, but favorable tax treatment may apply to lump sum distributions in the form of company stock.
For distributions received prior to age 59-1/2, an additional 10 percent excise tax is generally imposed unless the distribution was made on or after the employee's death, disability, or separation from service after attaining age 55.
Deductible cash dividends paid to ESOP participants are not subject to the early distribution excise tax; this favorable treatment does not extend to S corporation distributions.
Eligible ESOP distributions may be rolled over into an IRA or another qualified plan, in which case income taxes will be deferred.
ESOPs are not required to invest exclusively in company stock; many ESOPs have substantial investments in cash or other securities.
However, ESOPs normally have more than half their assets invested in company stock.
In addition, ESOP participants who are approaching retirement age must be given an opportunity to diversify their ESOP accounts.
For shares acquired by an ESOP after December 31, 1986, the ESOP must provide any participant who has attained age 55 and completed 10 or more years of service of participation in the ESOP with an annual option to diversify 25 percent of his or her ESOP account into investments other then company stock for five years.
In the sixth year, the participant must be given a one-time option to diversify up to 50 percent of his or her account.
At least three investment options must be offered within the ESOP to meet the diversification requirements.
Alternatively, the ESOP may transfer assets to another qualified plan, or make a distribution directly to the participant to satisfy the diversification requirements.
Benefit distributions from an ESOP may be made in cash or in company stock, subject to the put option described in Question 39.
ESOP participants must be given the right to require a distribution of their ESOP account balances in the form of company stock, unless the company's organizational documents restrict ownership of company stock to active employees, or the company is an S corporation.
In these cases, the ESOP can distribute cash or company stock which must be immediately resold to the company on the terms described in Question 39.
Benefits may be distributed in a lump sum or in installments.
If installment distribution are available, the minimum distribution period may not exceed 5 years.
Shares distributed from the ESOP can be subject to a right of first refusal in favor of the employer or the ESOP, or both.
This prevents the shares from being freely transferable by the former participant.
The ESOP put option requires a privately-held ESOP company to repurchase company stock distributed to ESOP participants during a 15-month period, beginning with the date the stock is distributed, for its appraised fair market value.
The 15-month term will include at least two different annual valuations.
The ESOP may be given the right to purchase the departing participant's stock (with cash accumulated in the ESOP) by "picking up" the put option, but only the employer company can be legally required to honor the put option.
Payments under the put option may be made in a lump sum or in installments at least annually.
The put option installment payment period may not normally exceed 5 years (except for certain large account balances), and the company must provide adequate security and pay reasonable interest on deferred installment payments.
Unless the participant elects to defer distribution, the ESOP must commence distributing vested benefits not later than the plan year following the plan year in which the participant retired, after reaching normal retirement age, became disabled, or died.
If an ESOP participant leaves the company before reaching normal retirement age for any other reason, the participant must be allowed to elect to begin receiving a distribution of vested benefits no later than the close of the sixth plan year after the plan year in which the participant separated from service.
Distribution may be delayed until the ESOP loan has been fully repaid (or the participant dies or reaches normal retirement age) to the extent that a participant's account balance includes C corporation stock that was acquired using a loan, and the loan has not been fully repaid.
Distributions that are deferred as a result of a former participant’s election are normally payable at normal retirement ages; they may not be deferred beyond age 70 1/2.
Because the company is required to repurchase the stock of departing ESOP participants under the put option discussed in Question 39, all privately held ESOP companies have repurchase liability for company stock held in the ESOP.
It is a liability that can grow, and one that should be planned for.
A company's repurchase liability is determined by a number of factors, including: the size of the annual contribution to the ESOP, changes in value of the stock, the vesting schedule, ages of the participants, number of participants, turnover rates, the proportion of stock and cash in the annual ESOP contribution, method of distribution and repurchase of the ESOP shares, and the diversification options of eligible participants.
Companies often find it useful to project the repurchase liability before making the final decision to implement an ESOP, or to purchase additional company stock.
Companies can use a variety of strategies to prepare for their liability, including: making sufficient cash contributions on an annual basis, providing insurance or other investment vehicles to generate funds necessary to cover plan participants' account balances, and repurchasing shares by using excess corporate funds.
When repurchase liability is a concern, a repurchase liability study should be conducted to project the repurchase liability under varying assumptions.
ERISA provides participants in all qualified plans with legal rights, and imposes penalties on fiduciaries who violate those rights.
In addition, ESOPs are subject to the prohibited transactions rules of ERISA and the Code.
The prohibited transactions rules require that purchases and sales of company stock which violate the law must be reversed, and impose severe financial penalties on persons connected with the company or the ESOP who participate in a prohibited transaction.
The risks of a fiduciary violation are reduced if the ESOP engages experienced, competent ESOP advisors, and the ESOP fiduciaries exercise their best independent judgment after reviewing all aspects of the transaction and fully informing themselves of the alternatives. |
