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 Rhode Island, as in all states, an Employee Stock Ownership Plan (ESOP) is regulated under federal law, specifically under sections of the Internal Revenue Code (IRC) and the Employee Retirement Income Security Act (ERISA). ESOPs are considered qualified defined contribution retirement plans that allow employers to contribute their own stock or funds to purchase such stock for the benefit of their employees. The shares in the ESOP are allocated to individual employee accounts and vest over time according to the plan's rules. Upon termination, retirement, disability, or death, the employee or their beneficiaries receive the vested shares. The IRS oversees the tax aspects of ESOPs, ensuring they meet the requirements of IRC section 401(a) to maintain their tax-qualified status. The Department of Labor (DOL) has jurisdiction over the fiduciary, reporting, and disclosure aspects of ESOPs. It is important for employers in Rhode Island to comply with these federal regulations when establishing and maintaining an ESOP to ensure the plan's benefits for employees and to maintain its tax-favored status.