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 Maryland, as in all states, an Employee Stock Ownership Plan (ESOP) is regulated by federal law, specifically under the Internal Revenue Code (IRC) section 401(a) and other applicable regulations. ESOPs are considered qualified defined contribution plans that must primarily invest in qualifying employer securities and comply with specific requirements of the IRC. The IRS oversees the tax aspects of ESOPs, ensuring they meet the qualifications for tax-deferred benefits, while the Department of Labor (DOL) is responsible for the protection of the employees' rights within these plans, including issues related to vesting, funding, and fiduciary responsibilities. Maryland does not have specific state statutes governing ESOPs, as the federal regulations are comprehensive in this area. Companies in Maryland that establish an ESOP must adhere to these federal guidelines to ensure the plan's tax-advantaged status and the proper administration of the ESOP for the benefit of the employees.