Employee Stock Ownership Plan, better known as an “ESOP,” is a way for employees to have ownership in the company they work for. They are used by several large successful companies because of the various tax benefits they can offer to the company as well as to the employee. Most commonly, employees obtain ownership of the company’s stocks as an award to help motivate and reward the employee. They are also a great way for employees to plan for retirement.
Because of how an ESOP works as a trust fund, employees generally do not have much control or access to their shares until they reach retirement age, or when their shares vest. Because of this lack of access, most ESOPs are treated just like a 401K, or any other retirement plan that is qualified under ERISA, when they file bankruptcy; therefore, ESOPs are treated as an exempt asset.
How does an ESOP work?
Just like a trust fund or spendthrift trust, all shares are retained in an ESOP trust until retirement age or termination of employment. Basically, when a company decides to set up an ESOP, they create a trust that the company makes yearly contributions to. The company then creates a formula that controls how employees receive stock in the company. Before an employee can have access to their stocks, their stocks must first vest.
My ESOP and bankruptcy.
As mentioned above, ESOPs are generally treated just like any other retirement plan in bankruptcy and are therefore an exempt asset, but your ESOP must first pass a two-step test.
First, you must figure out whether or not the ESOP is actually even a part of your bankruptcy estate. As long as there is an anti-alienation clause written in your ESOP documents that restricts your ability to access or transfer your stock, then it should be excluded from your bankruptcy estate. This anti-alienation clause also qualifies the ESOP under ERISA.
In Florida, courts have compared ESOPs to spendthrift trusts. One of the most important things about a spendthrift trust that makes it safe in bankruptcy is that they are set up by someone other than the beneficiary for the beneficiary’s benefit. Therefore, whether your ESOP is safe in bankruptcy really boils down to your access to the stock.
Florida courts have determined that ESOPs are safe where the debtor is unable to reach the stock after leaving employment until they reach retirement age and where they are unable to borrow money from the plan.
On the other hand, if a debtor’s interest in the stock vests and they can reach the stock upon termination or withdrawal proceeds prior to retirement age, then the debtor’s access or control over the stocks disqualifies the ESOP from the exemption and the ESOP will be subject to your bankruptcy estate.
Making sure that your ESOP is safe when you file bankruptcy is very important as they are most often an individual’s biggest asset. This is why it is so paramount to consult with an experienced bankruptcy attorney before filing bankruptcy. Contact the Law Office of David M. Goldman, PLLC.