Vesting & Distribution
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ESOP assets (cash and employer stock) acquired during each year (including any employer securities released from a suspense account) are allocated at year end to individual bookkeeping accounts established by the trustee for each employee participating in the ESOP. These accounts are part of the ESOP trust and are administered by the trustee, who is responsible for protecting the interests of employees and their beneficiaries.
An employee's ownership interest in his account in the ESOP trust is called his "vested interest," and the formula which determines his vested interest is set out in the ESOP's "vesting schedule." An ESOP, like most employee benefit plans, is designed to benefit employees who remain with the company the longest and contribute the most to the employer's success. Therefore, an employee's vested interest in the cash and employer securities held in his account in the ESOP trust is usually based on his number of years of employment. The minimum vesting standards which an ESOP must generally provide are either: (i) 100% vesting after five years of service; or (ii) a vesting schedule no less favorable than:
If an employee terminates employment for any reason other than retirement, death or disability, his vested interest under the ESOP is determined by referring to the ESOP's vesting schedule. If the employee has not worked long enough to have a vested interest in all of the stock and cash in his account, he forfeits the cash and employer securities in which he does not have a vested interest. The cash and stock that is forfeited is allocated among the accounts of the remaining ESOP participants in the same way that employer contributions are allocated.
If an employee retires or, in most cases, if he dies or is disabled, he will be 100% vested in all of the cash and employer securities in his account. Each employee who participates in the ESOP may designate a beneficiary who will be entitled to the participant's vested interest on the participant's death. A participant may receive his ESOP benefit in a lump sum distribution during a single taxable year or in several annual installments. The ESOP must begin to distribute vested benefits to a participant who has terminated his employment no later than the later of (i) the sixth year after the participant's termination, unless the participant consents to deferral to a later date, or (ii) the repayment in full of any loan used by the ESOP to finance its purchase of the employer securities. An ESOP may make distributions either in cash or in employer securities, provided that each participant must have the right to demand that his benefits be distributed in shares of employer securities. However, if the sponsoring employer's corporate charter or by-laws restrict ownership of "substantially all" outstanding employer securities to employees or to a qualified trust, cash distributions may be made without granting participants the right to demand stock. Participants receiving employer securities of a private company as a distribution have a right to "put" those securities to the employer during certain specified time periods. |