leveraged ESOP

Leveraged ESOP

An employee stock ownership plan in which the sponsoring company borrows funds in order to purchase shares from itself, which it then distributes or sells to employees as part of their compensation. It repays the loan with annual contributions.

leveraged ESOP

An Employee Stock Ownership Plan that borrows funds to purchase securities of the employer.
References in periodicals archive ?
Finally, because all but 100 percent leveraged ESOP transactions involve five- to 10-year notes to selling owners, sellers should expect to remain deeply engaged in the management and governance of their companies for an extended period of time.
Under a leveraged ESOP, funds are borrowed to purchase the shares from selling owners, and the shares are released to plan participants as the ESOP pays down the debt.
In a leveraged ESOP, the ESOP may borrow the funds to acquire
It has been suggested that the complexity of establishing a leveraged ESOP is usually not necessary since the same tax benefit can be accomplished if the employer borrows funds directly from a financial institution and contributes an amount of its stock to a stock bonus plan each year equal in value to the amount of its loan repayment.
Securities purchased by a leveraged ESOP are held in a suspense account and are allocated as the loan is paid off.
Michael Oneal, a Tribune reporter, worked out the numbers, and as he said, there is a "rich upside and chilling downside" to the heavily leveraged ESOP deal.
In addition, a leveraged ESOP must not obligate itself to purchase stock at an indefinite future time (although it can be given an option to acquire stock).
A leveraged ESOP has greater privileges than any other retirement program, however.
In a leveraged ESOP, the company borrows money, then loans it to a tax-favored ESOP trust created specifically for this purpose.
Furthermore, under current law, employers may deduct dividends paid on employer stock held in an ESOP, provided that either the dividends are paid out in cash to plan participants or the dividends are used to make loan payments for a leveraged ESOP.
It covers such topics as: the requirements for initial and continuing qualification under section 401(a); the uses of funds contributed to a leveraged ESOP; and, techniques for using a leveraged ESOP to provide financing to the employer corporation or as an alternative to a redemption of outstanding securities.