An employee stock ownership plan allows you to receive your company’s stock for free as a retirement plan perk. Should you leave because you have reached the company’s normal retirement age, or you have become disabled, expect distributions to start within the next plan year, the dates of which vary according to the company. Your beneficiaries would receive the distributions should you die. For example, if you retire in May 2018 and the plan year ends as of December 31, distributions must begin in 2019. However, if you quit your job or are laid off, you might not receive distributions for up to six years.
Annual Account Statement
By law, your company must send you an annual statement reporting the amount of cash and stock in your ESOP account. The human resources department can provide you with a copy if you do not have one. The number of vested shares is those you can keep after leaving the company. Vesting occurs in one of two ways. No vesting may happen in the initial years of your employment, but then 100-percent vesting occurs after a minimum of three years with the company. The other method, graded vesting, begins with 20 percent in the second year of employment and an additional 20 percent each year until 100 percent vesting is complete in the sixth year as an employee.
If you quit or are laid off, the ESOP distributions are deferred for six years under IRS regulations. Once those six years pass, you may receive the value of your ESOP shares in either one lump sum, or in basically equal payments made over five years. The installment payments are limited to six in number. The lump sum distribution may consist of shares, stock or a combination of the two, but if it is done in installments over five years, you receive the annual portion in the form of stock. That also means you may not receive all of your ESOP funds for up to 11 years after quitting your job.
Every ESOP must have a distribution policy which is included in the ESOP document or in a separate document outlining the distribution. Some plans may name a lump sum threshold, and if the vested amount in your account exceeds that threshold, you will have to go the installment route.
Retirement Account Transfers
Unless you want to pay the IRS a 10-percent penalty on your early ESOP withdrawal as well as regular income tax, you must transfer or roll over the money from your ESOP shares into another retirement account, such as a traditional IRA. Once you are 59-½, you can withdraw the funds and avoid the penalty, although the distribution is taxed at ordinary income tax rates. You do not have to make withdrawals from a traditional IRA account until reaching the age of 70-½.
Items you will need
- ESOP statement
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