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An employee stock ownership plan (ESOP) is a retirement plan in which an employer contributes its stock to the plan for the benefit of the company’s employees. 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.

In Alabama, as in other states, an Employee Stock Ownership Plan (ESOP) is governed by federal law, specifically the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code. ESOPs are defined contribution plans that invest primarily in the stock of the sponsoring employer. They are designed to provide retirement benefits to employees by allowing them to gain ownership in the company over time. The company contributes its stock or cash to buy its own stock to the ESOP trust, which allocates shares to employees' accounts. These contributions are tax-deductible for the company, and employees pay no tax on the contributions until they receive the stock when they leave or retire. It's important to distinguish ESOPs from employee stock option plans, which are compensation programs that give employees the right to purchase company stock at a future date at a predetermined price, not a form of retirement plan. Alabama does not have specific state statutes governing ESOPs, so the federal regulations are the primary governing laws for ESOPs in the state.

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