How to Cash Out Your ESOP Stock

Employees who leave their company can cash out ESOPs.
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Typically, the vested balance from your Employee Stock Ownership Plan (ESOP) can only be cashed out if you retire, end your employment, die or become disabled. The Summary Plan Description (SPD) details your company's parameters for redeeming your ESOP shares. If you do not have this document, you can contact your plan administrator for distribution requirements. The guidelines for company plans differ depending on how frequently the ESOP stock is valued, the annual accounting period or "plan year," and whether the ESOP borrows money to buy stock.

ESOP Distributions

ESOPs distribute or pay out benefits to employees once they leave the sponsoring company. Typically, this is due to retirement. But payouts can also result from the employee's death, disability or other reasons. If employees die, retire or become disabled, the company must start distributions the plan year following the plan year of the event.

Ending Employment

If your employment ends for other reasons, your ESOP plan can choose to pay you the value of your shares in a lump sum or in equal annual payments if the vested balance exceeds a pre-determined dollar amount defined in your SPD. The plan must disburse funds to you within six years from the plan year of your termination. If the company chooses to pay you with installments at the six-year point, it must do so over a five-year period and add interest. Check with your employer's plan administrator to find out its specific process.

Delayed Distributions

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In some case, ESOPs can delay payment of their benefits. This occurs if the ESOP is leveraged, meaning it has borrowed money to buy company stock. If the loan is outstanding, distributions to terminated employees do not have to begin until the plan year following the plan year the company repays the loan.

Vested Balance

The dollar amount of your account and your vested balance determines how much you receive when you cash out your ESOP. The percentage of your account that you legally own is your vested balance. You can acquire ownership by two methods of vesting. Cliff vesting provides you no vesting in the beginning years of your plan, but then gives you 100 percent vesting within three years after employment. Graded vesting provides 20 percent vesting after your second year of employment, and then 20 percent each of the following years until you become 100% vested after year six. A year of employment or service is defined as 1,000 or more hours in a plan year.

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