Employee Stock Ownership Plan (ESOP): What Does It Mean?
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An Employee Stock Ownership Plan (ESOP) is a retirement plan that grants employees ownership in the company—at no cost to them.
Unlike stock options, where the employee pays out of pocket to buy company shares, an ESOP distributes stock (or cash to purchase stock) directly into an employee's account.
In an ESOP, shares are contributed by the company and allocated to employee accounts over time, typically based on salary and a vesting schedule. The account balance grows or shrinks based on how well the company performs financially.
When the employee retires or leaves the company, vested shares are bought back by the plan or company, giving the employee cash for their retirement savings. Because an ESOP ties an employee's retirement directly to their employer's financial health, it is best paired with a 401(k) or IRA to diversify your total savings.
