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 New Jersey, 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 the Employee Retirement Income Security Act (ERISA). ESOPs are considered qualified defined contribution plans that must primarily invest in qualifying employer securities and comply with various requirements set forth by the IRC and ERISA. The IRS oversees the tax aspects of ESOPs, ensuring they meet the qualifications for tax-favored status, while the Department of Labor (DOL) is responsible for the protection of the participants in these plans. New Jersey does not have specific statutes governing ESOPs, as the federal regulations are comprehensive in this area. However, state law may impact aspects of ESOPs indirectly, such as in the areas of corporate governance and state taxation. It is important for companies in New Jersey considering an ESOP to ensure compliance with federal regulations and to consult with an attorney experienced in such matters to navigate the complexities of establishing and maintaining an ESOP.