Posted by
Brandon Keim |
Nov 15, 2024 |
Employee Stock Ownership Plans (ESOPs) allow employees to own shares in their company, but they come with several risks and tax considerations. ESOPs can lose value during bear markets, and since employees' investments are tied to one company’s stock, they lack diversification, increasing financial risk. Administering an ESOP is costly, involving legal, accounting, and compliance expenses. Additionally, shares in an ESOP may be bought back at lower-than-market value.
Regarding taxes, ESOPs are typically tax-deferred, meaning taxes are paid when funds are withdrawn. However, early withdrawals before age 59½ can incur a 10% penalty. Employees leaving the company may need to wait for the company to buy back their shares.