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 Illinois, as in other states, an Employee Stock Ownership Plan (ESOP) is a type of retirement plan that allows employees to benefit from the ownership of company stock. These plans are governed by federal laws, specifically under section 401(a) of the Internal Revenue Code (IRC), which qualifies them as defined contribution plans. ESOPs are unique in that they are designed to invest primarily in the securities of the sponsoring employer. The shares in an ESOP vest over time, and employees are entitled to the shares in their account upon termination, retirement, disability, or death. The administration of ESOPs is subject to oversight by both the Internal Revenue Service (IRS) and the Department of Labor (DOL), ensuring compliance with the IRC and applicable regulations. It's important to distinguish ESOPs from employee stock option plans, which offer the right to purchase company stock at a predetermined price, rather than providing stock as a retirement benefit. While Illinois state law does not specifically govern the structure of ESOPs, companies in Illinois must adhere to these federal requirements when offering ESOPs to their employees.