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 Minnesota, 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. The ESOP is a qualified defined contribution plan under section 401(a) of the Internal Revenue Code (IRC), which means it receives certain tax benefits. The plan is designed to hold primarily employer securities and must comply with various requirements set forth by the IRC and applicable regulations. The IRS oversees the tax aspects of ESOPs, while the Department of Labor (DOL) is responsible for the enforcement of the Employee Retirement Income Security Act (ERISA) provisions that apply to ESOPs, including those related to fiduciary responsibilities and the protection of plan participants. In Minnesota, ESOPs are subject to both federal regulations and any relevant state laws that govern retirement plans and securities. It's important for companies to ensure their ESOPs are in compliance with all applicable laws to maintain the plan's qualified status and the associated tax benefits.