Co-written by Eric M. Cotts
This article will present a brief overview of the rules relating to when and how a participant in an Employee Stock Ownership Plan (ESOP) is paid out. Note that the ESOP distribution rules discussed below are set forth in the tax code as minimum standards. In other words, an ESOP’s distribution rules must meet these requirements, but it is also acceptable for an ESOP to be designed so that its distribution provisions are more liberal.
The most important three issues involving distributions from an ESOP are commencement, duration and form of payment. "Commencement" relates to determining when an ESOP must begin to make benefit payments. "Duration" relates to determining over what period of time the participant’s entire benefit must be paid out once payment begins and "Form" relates to the different types of payment that are required or permitted.
