S ESOPs Could Produce Richer Retirement Accounts

September 26, 2005 (PLANSPONSOR.com) - Employee stock ownership plans (ESOPs) in S corporations end up more richly funding workers' retirement plans than workplace K plans, according to a new survey.

The latest National Center for Employee Ownership survey found that median account balances for S ESOP participants ranged from $75,000 to $100,000, while K plan median account balances ranged from $20,000 to $22,000, according to a BNA report.

The report attributed the difference in account balances to evidence that companies tend to make large annual contributions to ESOPs, according to the news report. In the sample used for the survey, nine of the 16 companies contributed 10% of pay or more. The report also said that one of the companies in the sample experienced a drop in its stock over the last five years. During that time span, two-thirds of the companies in the sample reported stock gains averaging 10% a year or more and four reported gains of 20% a year or more.

The report rejected the view that S ESOPs force employees to rely too heavily on company stock for their retirement. It said language in the Employee Retirement Income Security Act (ERISA) stipulates that S corporation ESOPs must allow employees to diversify up to 25% of their investment out of the company’s ESOP once they hit age 55, if they have at least 10 years of service to the company.

Subchapter S ESOP companies were first allowed by law in January 1998 when tax provisions were enacted to facilitate and encourage the creation of S ESOPs. ESOP trusts are exempt from the unrelated business income tax on any earnings attributable to the ESOP trusts’ shares of ownership.

The survey covered 1,863 employees in 16 S ESOP corporations.