Questions Related to ESOP Rules and Laws

Q. Consider a situation where an employee has been in service for 24 years and is an ESOP employee who is vested 100%. If this employee has been terminated, what procedures should be followed in order to avail the ESOP benefits before the said two years?
To begin with, the employee should go through the Employee Stock Ownership Program document. This would indicate whether the employee is allowed to buy out before the two years or not. The Internal Revenue Code of the year 1986 is an exception. As per this rule, distribution should be made latest by the end of the year that follows the year in which a person died, became permanently disabled or retired. Only if the employee has quit the job due to any of the aforementioned reasons, he/she would get two years from the date of quitting the job. One may get a maximum of six years if the reason is not one amongst the aforementioned reasons. If the performance of the company is good, then the value of the stock received as a part of the ESOP program would increase.

Q. Is it possible to be associated with a company as an advisor or a consultant even after cashing out? Where would one be able to find out the rule of law for this issue?
There is no federal law agency that governs the ESOP program. It is governed by the program documents prepared by the employer. According to the following provisions of the law, once any employee terminates his employment, he/she is entitled to take control of all the benefits that any ex-employee gets from the company. Therefore, it may be possible to be associated with the company as a consultant or an advisor. This would mean that the employee would be an independent contractor who is not an employee of the company, but is associated with the company “at arm’s length”. However, it is important that one verifies the ESOP program documents to ascertain if a non-employee would be entitled to all benefits as long as one is associated with the company or until a certain time frame has elapsed.

Q. How can a person who is 100% vested in an ESOP scheme cash out of the stocks?
A person’s ability to withdraw the money or cash the stocks will depend on the policy and terms mentioned in the ESOP program document. One should thoroughly review the document to check the rules regarding withdrawals. In majority of the programs, a withdrawal before time would be treated as withdrawal before retirement and would be taxed. Alternatively, one may roll-over the money into another retirement account. However, the most profitable option would be to apply for periodic payments as one would not be levied with an early withdrawal penalty. It would be in one’s best interest to check the program document before taking any decision.

Q. Is it possible to get a president/trustee terminated if an employee of an ESOP company believes that they are misusing the money?
The general standard is to call for a shareholder’s meeting by stating the reason for the meeting. As per the corporation bylaws, if the shareholders can decide by voting; then the president can be removed based on the voting pattern. However, if the employees do not have voting rights (though they are shareholders); then they may not be able to vote.
The ESOP terms and conditions are formulated by the employers and may be complex. Therefore, one may need to take assistance of an employment lawyer to understand the terms and policies.

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