Triple T Transport, Inc., of Lewis Center, OH near Columbus, launched its ESOP in January 2011 with owner financing. As a leveraged ESOP, “the company makes contributions to the trust in order to service the debt,” notes Wade Amelung, Triple T’s chief financial officer. “Shares are held as collateral; as debt is paid down, the shares are allocated to employee accounts using a formula,” he explains.
Contributions to an ESOP are allocated in pre-tax dollars to employee accounts, usually based as a proportion of annual compensation. To prohibit discrimination in favor of highly compensated employees, the plan must cover a substantial percentage of lower-paid workers, and annual compensation is limited. In 2018, the limit is $275,000.
Participants & distributions
Generally, all employees 21 or older with at least one year of service are eligible to participate. Employee ESOP accounts become vested over time—usually 100 percent after three years of service (referred to as cliff vesting) or gradually increasing with each year of service over a six-year period.
Employees receive a distribution from their account when they leave the company, based on fair market value (for private companies) or current market price (for public companies) of the shares they own. The distribution can be in a lump sum or parceled out over a five-year period. If an employee leaves before being fully vested, the employee forfeits the nonvested amount, which is reallocated among remaining participants.
Why establish an ESOP?
Establishing an ESOP offers numerous benefits to shareholders, the company, and employees. Shareholders wishing to sell their stock have a ready market. More importantly, ESOPs offer an effective exit strategy for a business owner by providing liquidity, tax advantages, and flexibility.
As an exit strategy
About two-thirds of ESOPs are established to provide a market for the shares of a departing owner. A ‘C’ corporation owner can defer paying capital gains taxes by selling 30 percent or more of qualified shares to an ESOP and reinvesting the proceeds into a qualified replacement property.
Salad Savoy Corporation, headquartered in Salinas, CA, started actively seeking an exit solution in 2015 for its owners who wanted to retire. By 2017, just two years later, Salad Savoy was an employee-owned company.
Since its founding in 1984, the company has enjoyed “a consistent increase in business,” according to chief executive officer Seth Karm. The 1990s, in particular, were a time of major growth as Karm says, “the industry really started to pay attention to our corner of ‘Color, Taste & Nutrition’ in the mid-1990s.”
