An employee stock ownership plan (ESOP) is a retirement plan in which an employer contributes its stock (or money to buy its stock) to the plan for the benefit of the company’s employees. The plan maintains an account for each employee participating in the plan. Shares of stock vest over time before an employee is entitled to them. With an ESOP, an employee never buys or holds the stock directly while still employed with the company. If an employee is terminated, retires, becomes disabled, or dies, the plan will distribute the shares of stock in the employee’s account. This type of plan should not be confused with employee stock option plans, which give employees the right to buy their company’s stock at a set price after a certain period of time.

An ESOP is a qualified defined contribution plan—under Internal Revenue Code (IRC) section 401(a)—that is a stock bonus plan or a stock bonus/money purchase plan. See 26 U.S.C. §401(a). An ESOP must be designed to invest primarily in qualifying employer securities—as defined by IRC section 4975(e)(8)—and meet certain requirements of the IRC and applicable regulations. The Internal Revenue Service (IRS) and the Department of Labor (DOL) share jurisdiction over some ESOP features.

In California, an Employee Stock Ownership Plan (ESOP) is a type of retirement plan that allows employees to benefit from the company's growth through the allocation of company stock. ESOPs are governed by federal law, specifically under section 401(a) of the Internal Revenue Code (IRC), which requires these plans to be qualified defined contribution plans. This means they must adhere to certain IRS requirements regarding their operation and the benefits they provide. Additionally, ESOPs must focus primarily on investing in qualifying employer securities as defined by IRC section 4975(e)(8). The IRS is responsible for ensuring that ESOPs comply with tax rules, while the Department of Labor (DOL) oversees the fiduciary responsibilities and the protection of the employees' rights within the plan. In California, ESOPs are also subject to state laws that govern retirement plans and employee benefits, but these are generally preempted by federal regulations. It's important to distinguish ESOPs from employee stock option plans, which are different in structure and regulation.