ESOP – Diversification and Getting Your Money
In a previous blog we discussed “How ESOP’s work and how we benefit“. Then we covered what it means to be “vested“. Both of these topics are important to employees that are relatively new to the program.
Now we are going to take a look at a topic that is important to employees that have had a long and successful career with their company – namely “Diversification and Getting Your Money“.
Diversification – What does it mean?
Jerry Bohnsack Explains Diversification
Diversification is when you move part of your ESOP shares into another qualified plan, such as a 401k plan. The capability to do this is actually an IRS requirement.
As you may remember from the Vesting blog, over an employee’s career in an ESOP company, the employer has been donating company shares into two buckets allocated to the employee. Once the employee is fully vested, all of the company shares in that bucket belong solely to the employee. Eventually, the time will come when it is appropriate to start moving shares out of that one big bucket and into a group of other smaller buckets, all of which still belong to the employee.
To start, all of the shares in your ESOP account are in one bucket tied to one company. Diversification is the act of moving these shares from your ESOP account – shares tied only to one company – and spreading them out to smaller buckets tied to multiple companies through a 401k plan.
At all times, and especially as an employee nears retirement, it is wise to diversify your retirement savings and investments.
Diversification – What are the rules?
These rules govern when you can begin the diversification process. There are 4 main rules that apply.
- The employee must have 10 years of service with the company.
- The employee must be 55 years old.
- Between the ages of 55-59, the employee can diversify 50% of their ESOP shares.
- Between the ages of 60-65, the employee can diversify 75% of their ESOP shares.
Once these rules are satisfied, there is a formula to determine the number of shares the employee is able to diversify.
‘Number of Shares Available for Diversification’ = ‘Number of Shares Received’ x 50% or 75% (based on age) – ‘Number of Shares Previously Diversified’
The actual dollar amount is established by taking the ‘number of shares available for diversification’ and multiplying that by the value of the stock. The resulting dollar amount is then available to be diversified into a 401K plan. The company shares are effectively retired from your ESOP account and the funds distributed to the ‘smaller buckets’ are available through the 401k plan.
ESOP – Getting Your Money
Jerry Bohnsack Explains ‘How Do I Get My Money’
(Isn’t it great that our CFO keeps stack of 100’s in his top drawer!) Now that you are ready to retire and get your money out of the ESOP, what needs to be done?
- Determine the worth of your ESOP account. This is calculated on the next stock evaluation date after you retire. Once the worth is calculated…
- Determine if you have meet the ‘rule of 60’. This rule determines if you have reached retirement age, the formula is: ‘age of employee’ + ‘years of service’; if > 60, then retirement age is meet.
When you take your money, you have a couple options to consider.
- You can elect to take all of your money with a taxable distribution. The government would take a portion of your money as taxes and the remainder would be yours.
- You can elect to take your money as an IRA. The full amount would be rolled over into the IRA of your choice and taxes taken as money is distributed from the IRA.
For further information, please contact a member of the Cross Employee Ownership Committee.