Who can be an ESOP Trustee? (2024)

As a qualified retirement plan, employee stock ownership plans (ESOPs) are required by law to have an ESOP trustee. Selecting an ESOP trustee is a critically important part of establishing and maintaining an ESOP and should be undertaken with care.

What is an ESOP Trustee?

An ESOP trustee is an objective third-party who has fiduciary responsibilities for the ESOP. As fiduciary, the trustee has legal ownership of the company stock and must always make decisions and act in ways that are in the best interests of the plan participants and beneficiaries. The ultimate role of the trustee is to protect participants while improving the ESOP.There are two different types of ESOP trustees. Specifically, ESOP transaction trustees and ongoing trustees.

  • Transaction trustees are appointed when an ESOP is being formed, is sold, or is terminated. Their role is to manage the transaction on behalf of the ESOP company’s employees, ensuring share prices are fair market value and the deal is structured appropriately for participants.
  • Ongoing trustees manage the routine, annual work of the ESOP such as monitoring performance, valuing stock and overseeing stock allocations to participants, and reviewing financial statements. A transaction trustee can become an ongoing trustee.

The Role of An ESOP Trustee

Who can be an ESOP Trustee? (1)

ESOP trustees are tasked with performing due diligence to ensure all legal rules and requirements surrounding the formation and management of the ESOP are followed. This includes reporting and filing records with the Department of Labor (DOL) and the Internal Revenue Service (IRS). The ESOP trustee is liable for over- or under-valued share price claims. If claims are filed against the ESOP, the trustee is responsible for handling them in coordination with the company. By ensuring compliance with all of the relevant rules and regulations governing ESOPs, the trustee acts as a safeguard against lawsuits and is an advocate for plan participants. Three specific tasks assigned to the trustee are:

Ensure an Independent ESOP Appraisal

ESOPs must undergo an independent appraisal to determine share pricing every year. The trustee is responsible for hiring an independent appraiser to arrive at a fair market value share price on the last day of the plan year. The primary goal of this annual activity is to ensure shares are priced at current fair market value so that plan participants receive fair value in their accounts.

Set an Annual ESOP Stock Price

The trustee reviews the results of the independent appraisal for accuracy and to ascertain the effect of the value on the plan performance. Based on the results of the appraisal, the ESOP trustee will set the annual ESOP share or stock price. This price is used to allocate new shares to participants and to prepare current participant statements.

Manage ESOP Assets

Upon formation of the ESOP, an ESOP trust is created. This trust is managed by the ESOP trustee who is the legal shareholder of the shares in the plan. Throughout the year, the trustee meets with company management to monitor operations and financial performance. They will ensure all DOL and Employee Retirement Income Security Act (ERISA) requirements are being met and that plan participants know the value of their shares and account balances. Importantly, the trustee oversees the annual distribution of shares as well as the buyback of shares from participants who retire from the company.

Who Can Be an ESOP Trustee?

ESOP trustee selection is conducted by the board of directors after a thorough vetting process. ESOP trustees can be company employees or even the selling owner or be completely independent of the company. Some companies fear losing control of the company by placing so much responsibility in the hands of an independent trustee and opt to give the responsibility to a trusted insider. Others understand the risks and liability of being in charge of the ESOP or are unable to manage the ESOP in-house and prefer to have a completely independent party oversee it. Internal trustees may experience conflicts of interest as an ESOP trustee because they are usually also part of the upper management team, may have incentive plans that are tied to share prices, and may even serve on the company’s board of directors. For these reasons, it is recommended that trustees be independent of the company even though it is not a legal requirement. Regardless of whether they are independent or not, the duties of the trustee remain the same: to always act solely in the best interests of plan participants. All trustees also must sign process agreements which set guidelines, responsibilities, and procedures that the ESOP trustee must follow.

Should an ESOP Trustee be on the Board of Directors?

Trustees monitor the company’s board of directors and attend board meetings in order to fulfill their duties, but this does not mean they should be part of the board. In fact, it is better if they do not sit on the board in order to maintain their independence. Remaining independent of the board reduces the potential for the many different conflicts of interest that could arise between managing the company and managing the ESOP. The typical role of the ESOP trustee is to act in a consultative and oversight capacity, ensuring the board is always acting in the employees’ best interests. Most ESOP plan documents allow the board to recommend the removal and replacement of an ESOP trustee and also give trustees the same ability to remove and replace board members.

Aegis Trust Company’s ESOP Trustee Services

The ESOP trustee is a vital part of any successful ESOP. Managing ESOP transactions and maintaining an ESOP takes a team of experienced professionals like those at Aegis Trust Company. Our trustee services include ESOP Transaction Trustee and Ongoing ESOP Trustee. We also offer ESOP consultations to help businesses learn more about the process and requirements governing ESOPs. Contact us to receive more information about ESOPs and to learn how we can help you navigate the process.

DISCLAIMER: The Articles displayed on this website do not constitute legal advice, nor do they substitute for the advice of qualified professionals. While the Articles displayed on this website are designed to provide information regarding the subject matter covered, we cannot guarantee the accuracy of any statements contained therein. If any legal advice or expert assistance is required, the services of qualified professionals should be sought.

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Who can be an ESOP Trustee? (2024)

FAQs

Who can be a trustee of an ESOP? ›

ESOP trustee selection is conducted by the board of directors after a thorough vetting process. ESOP trustees can be company employees or even the selling owner or be completely independent of the company.

What is the fiduciary duty of an ESOP trustee? ›

A fiduciary is required to conduct the affairs of the ESOP trust with the care, skill, prudence and diligence under the circ*mstances then prevailing that a prudent man then acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.

Who can be an ESOP? ›

ESOP Rules governing employee eligibility

In order to satisfy IRS nondiscrimination guidelines, ESOP rules state ESOPs must cover a substantial percentage of non-highly compensated employees who have attained age 21 and completed a year of service.

Can a board remove an ESOP trustee? ›

Rather, the trustee acts in a consulting and oversight capacity, ensuring that the board is serving the shareholders' best interests. The board can recommend removal or replacement of an ESOP trustee, and the trustee can do the same with directors.

Does an ESOP need a trustee? ›

Role of the employee stock ownership plan trustee. As a qualified retirement plan (QRP) under Section 401(a) of the Internal Revenue Code, an employee stock ownership plan (ESOP) is required to have a trustee.

Can a bank employee be a trustee? ›

With a bank, the actual person overseeing the trust may change, but the bank will handle it and will appoint another knowledgeable, experienced employee as trustee.

What is the difference between a trustee and a fiduciary duty? ›

The Fiduciary of a Trust is the Trustee, who is tasked with overseeing the management of property and assets within the Trust. Simply put, a Fiduciary is someone who acts on behalf of another person, often in a legal or financial capacity.

What is the fiduciary position of a trustee? ›

The relationship between trustees and beneficiaries is known as a fiduciary relationship, and has at its core an obligation of loyalty, trust and confidence, with no conflict and no profit rules on the part of the trustee. There is also a general duty of good faith (to act openly and honestly).

What type of trust is an ESOP? ›

EOTs, ESOPs, and ESOTs: Know Your Acronyms

In ESOPs and EOTs, the trust becomes the direct owner of the business and acts on behalf of employees, who are considered beneficial owners. In an ESOP, the trust is referred to as an employee stock ownership trust, or ESOT — not to be confused with an EOT.

What is the ESOP 25% rule? ›

ESOP rules set a limit of 25% of salary as the maximum amount that can be contributed to a participant's account annually, though most companies contribute between 6-10% of salary annually. The 25% is a combined limit that includes ESOPs, 401(k)s, profit sharing, and stock bonus plans offered by the company.

What is the 3 year rule for ESOP? ›

Cliff vesting describes a vesting schedule in which employees have no vesting until, after a minimum term of service (federal minimum requirement is 3 years, but ESOP company plans can vary), they become 100% vested.

Who Cannot participate in an ESOP? ›

As a tax-qualified plan, ESOP participation must be available to a broad cross-section of employees who meet statutory standards, not just to a select group of key executives. However, union employees may be excluded if retirement benefits are the subject of good-faith negotiations with the union.

Can a board of trustees fire a CEO? ›

It's a question that's been on the minds of many business owners, can a board of directors fire a CEO? The answer is yes, they can. However, there are certain circ*mstances where it may not be possible. If the CEO is appointed by the board, then the board has the power to remove them from their position.

Can you terminate an ESOP? ›

There are many mature ESOPs, and as time goes on various plans are terminating for a number of reasons, ranging from the sale of the company stock or assets, liquidation, high plan costs, and other factors.

Who regulates ESOPs? ›

An ESOP must be designed to invest primarily in qualifying employer securities as defined by IRC section 4975(e)(8) and meet certain requirements of the Code and regulations. The IRS and Department of Labor share jurisdiction over some ESOP features.

What's the difference between trustee and shareholder? ›

The trustees therefore may own shares on behalf of the trust and are able to vote and attend to the trust's business. They act as shareholders in this capacity and should always act in the best interests of the trust. A company is managed by its directors and other officers.

Who is the trustee of a company shareholding? ›

Answer. A Trust can be the beneficial owner but cannot directly hold the shares of a company. The trustees of the trust, either individuals or a corporate must hold the shares on behalf of the trust.

Can a trustee be a shareholder of a company? ›

A trustee can own company shares for the benefit of beneficiaries. For example, if you run your own company, you can set up a trust to hold your shares. If you're the trustee, you can distribute profits from the trust to yourself. However, as with all trusts, a trustee cannot be the sole beneficiary.

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