Employee Stock Option Plans vs. ESOPs – Understanding the Difference

06/24/19

Employee Stock Ownership Plans (ESOPs) 

An employee stock ownership plan (ESOP) is a retirement plan in which the company 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, you never buy or hold 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. 

The U.S. Department of Labor’s Employee Benefits Security Administration, not the Securities and Exchange Commission (SEC), oversees ESOPs. If you have a question about your ESOPs, please contact: DOL – Employee Benefits Security Administration at (202) 219-8776 (Toll-Free: 1-866-444-EBSA (3272)). 

If you have a complaint about your plan, you can learn the procedures for filing a claim on the EBSA’s website. For help in finding a lawyer who specializes in pension matters, you can visit the website of the National Pension Lawyers Network. You can find information about pensions from the EBSA’s home page. 

For more information about ESOPs, take a look at the website of The National Center for Employee Ownership

Employee Stock Option Plans 

Under the law, an employer can provide its employees an opportunity to participate in a stock option, stock appreciation right or a bona fide employee stock purchase program.  

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Many companies use employee stock options plans to compensate, retain, and attract employees.  Employee stock option plans are not retirement plans. Instead, employee stock options plans are contracts between a company and its employees that give employees the right to buy a specific number of the company’s shares at a fixed price within a certain time period. The fixed price is often called the grant or exercise price. Employees who are granted stock options hope to profit by exercising their options to buy shares at the exercise price when the shares are trading at a price that is higher than the exercise price. 

Companies sometimes revalue the price at which the options can be exercised. This may happen, for example, when a company’s stock price has fallen below the original exercise price. Companies revalue the exercise price as a way to retain their employees. 

Employee stock options plans should not be confused with the term “ESOPs,” or employee stock ownership plans, which are retirement plans.  

To Learn More

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CMR & Associates provides independent retirement and insurance advice by reviewing your current plans to improve coverage and reduce cost. Through our proprietary database – The CMR Database®(comprised of some 13000 brokers and specialists globally) – we maximize access to the retirement and insurance industry for greater options that will translate to better coverage and lower cost. Since 1999, we have saved clients over $120 million.

Please email CMR Associates or call 877-447-4301 or 212-447-4300 for more information.