ESOP Options When Your Employer is Purchased

February 19, 2019

When companies are sold or merge, one of the first employee concerns – second to “Will I still have a job?” – is what will happen to their benefit plans like 401(k) or employee stock ownership plans (ESOPs). There are three things that could happen, but the specific course of action for your plan should be announced by your employer. Your current plan could:

  • Merge into the new company’s plan.
  • Continue to operate separately.
  • Be terminated.

It’s unlikely that 401(k) plans would be terminated and the assets distributed to employees. The other two scenarios are much more common. ESOP plans, however, are different from 401(k)s. Depending on how the company sale is structured, one of the following options may be available:

  • If the purchaser is an ESOP company, too, they could convert the shares of the selling company into their own shares and hold them in their existing plan.
  • The purchasing company can “buy out” the shares in an ESOP plan and put the money in an employee’s account in a 401(k) plan. Depending on the rules of the sale and the purchaser’s 401(k) plan, there may be opportunities to roll this money into a separate IRA.
  • The purchasing company can make a lump-sum purchase and give employees cash for their shares. In this case, it’s a taxable event and is not typically the preferred method for this type of conversion.

Every merger or acquisition is different, so your options may vary slightly, too. Understand, however, that employee benefit plans affect much more than simply your future retirement. Investments impact everything from your daily cash flow and tax liabilities to your estate plan and more. That’s why truly strategic financial advice must encompass your complete financial picture, not simply one piece of a much larger plan.

Blog by Andrew Gaskill, Financial Services Manager.

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