For many trucking companies, recruiting and retaining top talent is an ongoing challenge. Employee stock ownership plans (ESOPs) can be an attractive addition to an employee’s overall compensation and benefits package. This final article in our three-part series outlines employee incentives and company legacy benefits of ESOPs.
Employee Incentives
ESOPs can provide significant retirement benefits to long-term employees of trucking companies, and any employee who is at least 21 years old and has one year of service with the company is eligible to participate. According to the National Center for Employee Ownership, employees at ESOP companies have 2.2 times greater retirement accounts than employees at companies without an ESOP and 20% more financial assets overall compared to non-ESOP companies.1
As the company makes annual contributions to the plan, the ESOP uses those contributions to make payments on the ESOP loan. These loan payments trigger the release of shares, which are then allocated to eligible participants. The shares are typically allocated pro rata based on each employee’s eligible compensation compared to the total compensation of all other eligible participants (within certain IRS limits). For example, a participant earning $50,000 per year will receive twice as many shares as a participant earning $25,000 per year.
Participants who receive allocations of shares become vested in that benefit over time. To become vested in their account, participants usually must have three to six years of service with the company. Because an ESOP is a type of qualified retirement plan, there are special rules regarding when participants are entitled to receive a distribution of their account balance. In most cases, employees receive a distribution of cash equal to the value of their account instead of stock. With a leveraged ESOP, it’s critical the plan is designed to delay significant cash distributions until the ESOP debt is repaid. In the early years, this allows the company to retain operating cash flow to service debt rather than pay benefits to terminated participants.
Key members of management will usually participate in the ESOP along with other employees. However, to retain key management and help ensure their goals and objectives are properly aligned with the ESOP’s, it’s often important to provide additional equity incentives, such as incentive stock options or stock appreciation rights. Extending these incentives to the management team is a key element to the success of the ESOP transition and the company’s future performance. Such incentives, when taken into consideration with the total compensation package, must be considered reasonable by the ESOP trustee.
Company Legacy
Owners of closely held companies often wish to retain the company name and history, protect employees, and help preserve the communities in which they operate. The thought of selling the trucking company to an outsider often conjures images of layoffs, undue oversight, a new management team, and possibly a new name above the door. For many owners, this isn’t a palatable option.
An ESOP can help address these concerns while providing a viable means of creating stockholder liquidity over time. When considering an ESOP transaction, it’s important to remember that selling stockholders can continue to manage the company, even if 100% of the stock is sold to the ESOP.
ESOPs Can Help
An ESOP can be a powerful succession planning tool for certain trucking company owners. It may not be the ideal strategy in all situations, but for stockholders looking to implement a permanent succession plan, preserve company legacy, and reward employees, an ESOP may be just what they’re seeking. It is critical to coordinate with key stakeholders throughout the ESOP implementation process to make sure the structure will be successful.
For more information, see the first article in our three-part series, “From Highways to Ownership: Exploring ESOPs for Trucking,” which outlines an ESOP structure and provided an overview of the potential benefits. The second article, “From Highways to Ownership: Tax Benefits for Trucking ESOPs,” focuses on tax advantages and planning strategies for both the stockholders and the company. Additional information is also available in our FORsights™ article, “Creating a Construction Company Legacy.”
How Forvis Mazars Can Help
ESOPs are inherently complex, but an experienced professional can help business owners gauge whether an ESOP is the right tool to help them accomplish their goals and objectives. Forvis Mazars understands how critical it is to consider various ESOP matters when developing plans for the future. If you have any questions or need assistance, please reach out to one of our professionals.
- 1“ESOPs as Retirement Benefits,” nceo.org, September 20, 2010.