1. Where Company Makes a Stock Contribution

In this scenario the company contributes stock to the ESOP. The stock is allocated to the employees'  ESOP accounts in that same tax year as the contribution. Distribution to employees depend on plan rules regarding vesting and distributions upon termination. Those rules are similar to distributions from any defined contribution pension plan.esop-chart1

2. Basic Stock Bonus ESOP Cash Contribution where the company contributes cash to purchase stock for the ESOP

In this scenario, the selling stockholder sells his/her stock back to the company through the ESOP. If the seller (or a group of sellers) have sold at least 30% of the C corporation’s voting stock to the ESOP, those sellers will be eligible for a deferral of capital gain on the proceeds of the sale, if they buy “qualified replacement property”. The stock is allocated to the employees’ ESOP accounts in that same tax year as contributed, usually based on the employee’s compensation as a percentage of the total “covered compensation”. Distribution to employees depends on plan rules regarding vesting and distributions upon termination. Those rules are similar to distributions from any defined contribution pension plan.

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