Employee stock ownership plans are company retirement plans in which the company contributes stock to its employees' accounts. You never actually buy or hold this stock in anything but the ESOP account. Regulations on ESOP payouts depend on the way the company plan is set up and also why you leave the company's employment -- whether you find another employer, retire, become disabled or die. Your best bet is reading your company's ESOP plan thoroughly.
According to the National Center for Employee Ownership, if your ESOP account balance is more than $5,000, the company can't make you take a payout, or distribution, until you reach your normal retirement age. Your company's ESOP plan includes what it considers normal retirement age, but it can't be past 65. If you are still working past normal retirement age, you must begin taking distributions by April 1 in the year after you turn 70 1/2. If your vested stock is worth less than $5,000, the company can force a payout.
By law, distributions must begin within six years after you leave or are terminated from the company's employ, unless you give specific instructions otherwise. You can choose to be paid in installments over a five-year period, with interest. One caveat: if the ESOP borrows funds to purchase stock and hasn't finished paying off the loan, distributions to former employees don't need to start until the year after the company's accounting year in which loan repayment takes place. While the accounting year varies according to the company, it is often the same as the company's fiscal year. This two-year time frame also exists if you reach the company's normal retirement age after you leave employment. For example, if you leave the company at age 64, you might not receive distributions until reaching age 66, rather than at 65.
Death or Disability
If you become disabled, payouts must start during the company's accounting year following the one in which the incident occurs. That can mean two years after you leave due to disability. The same holds true for your beneficiaries if you die while still employed.
The NCEO warns that it isn't usually a wise idea to keep your account in the ESOP after retirement or leaving the company. Keeping a large percentage of your retirement money in the stock of one company can be risky. You can roll over your ESOP into an individual retirement account without paying tax. Consult a financial professional for the best way to invest these IRA funds. Once you begin taking distributions, the money is taxed as regular income, but in retirement you are generally in a lower tax bracket than during your working years.
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