Business Account
Self-directed ESOP
A retirement plan that puts shares of your company directly in your employees' hands. Accuplan handles the plan, the records, and the annual filing.
A retirement plan owned by the people who run the company
Shares in. Retirement out.
An ESOP is a qualified retirement plan that holds stock of the sponsoring company. The company contributes shares (or cash that the plan uses to buy shares), and those shares get allocated to participant accounts. When a participant retires or leaves, the plan distributes the value of their vested shares, and the company buys them back. ESOPs are a real ownership-and-succession tool for closely-held businesses, with tax treatment built into the design. Official IRS guidance on ESOPs covers the rules in detail.
2026 at a glance
The numbers and rules you'll come back to.
$72,000
Hard cap on total contributions per participant
$360,000
Pay cap that the contribution math runs against
5 years
Standard distribution period after separation
Age 55
When older participants can diversify out of stock
100% vested
After three years (or graded over six)
Form 5500
Annual return Accuplan prepares
How it works
An ESOP, in plain language.
Six things to understand before you set one up. Numbers below reflect the latest IRS cost-of-living figures for 2026.
A few terms we'll use
- ESOP
- Employee Stock Ownership Plan. A retirement plan that holds shares of the sponsoring company so employees own a real stake in the business they work for.
- Qualified employer security
- The shares the plan can hold. For most ESOPs, that is common stock of the sponsoring company.
- Allocation
- How shares are divided among participants each year. Usually based on pay, sometimes weighted for years of service.
- Vesting
- When the shares in a participant's account legally belong to them. Most plans either vest at 100% after three years or phase in over six.
- Diversification
- The right of older participants to move some of their ESOP balance out of company stock and into other investments. IRS, ESOPs.
- NUA
- Net Unrealized Appreciation. A special tax election available when employer stock leaves the plan in a lump sum. Splits the tax bill so the growth gets long-term capital-gains treatment instead of ordinary income.
- Repurchase obligation
- The sponsoring company's promise to buy back shares from participants when they leave or retire. Funded by the company, not by Accuplan.
- Form 5500
- The annual return every ESOP files with the IRS and Department of Labor. About Form 5500.
Who can sponsor
The plan needs corporate stock to hold, so the company has to be a corporation.
C-corporations
The original ESOP form. Eligible for the §404(k) deduction when the company pays cash dividends through the plan to participants.
S-corporations
Allowed since 1998. ESOP-owned S-corps get a powerful tax outcome because the share of corporate income that flows to the ESOP is generally not taxed at the federal level.
Not for sole proprietors
No corporate stock to contribute. The same is true for single-member LLCs and most partnerships unless they elect to be taxed as a corporation.
Most employees covered
ESOPs follow the same coverage and non-discrimination rules as other qualified plans. Employees age 21 or older with one year of service generally have to be eligible.
If the structure does not fit, ask us about a Solo 401(k), SEP IRA, or SIMPLE IRA instead.
How shares get into the plan
Two routes, sometimes both.
Direct stock contribution
The company issues new shares (or contributes existing treasury shares) into the plan. No cash changes hands. The company gets a tax deduction equal to the appraised value of the shares.
Cash contribution to buy shares
The company puts cash into the plan and the trustee buys shares from the company itself or from a selling shareholder. The cash is tax-deductible, the same way other employer retirement contributions are.
Some sponsors also use a leveraged ESOP, where the plan borrows to buy a large block of shares up front and the loan is paid back with future contributions. Leveraged ESOPs are common in ownership-succession deals and are administered by specialist trustees, not by Accuplan.
2026 contribution limits
The most that can land in any one participant's account in a year.
$72,000
Hard cap
Combined company contributions and any employee deferrals to the plan, per participant. Whichever is smaller, this dollar figure or 100% of the participant's pay.
25%
Of total payroll
The deduction limit on what the company can put into the plan as a whole, calculated against the eligible payroll.
$360,000
Pay cap
Only the first $360,000 of any one participant's pay counts when the contribution and allocation math runs.
Limits update each year. The IRS reissues the figures every November. IRS Notice 2025-67 has the 2026 amounts.
Vesting
When the shares in a participant's account become legally theirs.
3-year cliff
Nothing vests for the first three years. After three full years of service, the participant is 100% vested in everything in their account, including future contributions.
2-to-6-year graded
Vesting builds over time. 20% after two years, 40% after three, then 60%, 80%, and 100% by year six.
ESOPs follow the standard ERISA vesting rules. The plan picks one of two schedules, and 100% vesting is reached either way within three or six years. DOL guidance on retirement plans covers the schedules.
Diversification rights at age 55
Older participants can move part of their balance out of company stock.
Who qualifies
Participants who have reached age 55 and have at least 10 years in the plan.
How much, years 1 to 5
Up to 25% of the participant's account balance can be diversified into other investments during each of the first five years of the diversification window.
How much, year 6
In the final year, the limit rises to 50% of the participant's account.
The put option
If the participant later leaves the company and the shares are not publicly traded, the company has to offer to buy them back at the appraised price.
This is a participant-protection rule. Plans can offer faster or richer diversification, but they cannot offer less. IRS, ESOPs.
When and how distributions happen
The plan pays out the value of the participant's vested account.
Trigger events
Retirement, death, disability, or any other separation from service. Distributions usually start within a year of retirement, death, or disability, and within five years for other separations.
5-year payout, by default
Most plans pay out the balance in roughly equal installments over five years. The company funds each installment by buying back the shares.
Up to 10 years for big balances
Account balances above $1,455,000 for 2026 can be paid out over a longer period, adding one extra year for each $290,000 of excess, up to a maximum of ten years.
Cash or actual shares
The plan can pay in cash equal to the share value, or in actual company shares. Participants generally have the right to demand stock unless the company's charter restricts ownership.
The 5-year period and the 2026 dollar thresholds are set in IRS Notice 2025-67.
Tax mechanics
When tax gets paid (and when it doesn't).
ESOPs have several tax-planning features. The headline ones for participants and the sponsoring company are below.
Participants pay tax at distribution
Shares in the plan grow tax-deferred. Tax is paid when distributions are taken, not while the shares are held in the account. Official IRS guidance.
10% penalty before age 59½
Distributions taken before age 59½ generally owe a 10% early-withdrawal penalty on top of income tax. Death, disability, and separation from service after age 55 are exceptions. A rollover skips the penalty entirely.
NUA election on lump sums
When the actual shares come out as a lump sum, participants can elect Net Unrealized Appreciation treatment. The cost basis is taxed as ordinary income now, and all the growth waits until the shares are sold and is taxed at long-term capital-gains rates. IRS Publication 575 covers the mechanics.
Deductible dividends for C-corps
When a C-corporation pays cash dividends on ESOP-held shares and those dividends are passed through to participants or used to repay an ESOP loan, the dividends are deductible to the company. Authority for the deduction.
How to start
Setting up your ESOP.
Four steps from adoption to year-end recordkeeping. We provide the plan document and run the participant accounting. The company arranges a trustee, an independent appraiser, and any required audit.
Adopt the plan document
We provide the ESOP plan document and adoption agreement. You sign it. The plan has to be in place by the last day of the plan year you want contributions for.
Designate a trustee
Every ESOP has a trustee who holds the shares for participants. That role sits with the company or an independent trustee, not with Accuplan.
Fund the plan
Contribute company stock directly, or contribute cash and have the plan buy shares from the company or existing owners. An independent appraiser sets the share price each year.
Annual recordkeeping and reporting
We track participant accounts, vesting, and allocations year over year, and prepare the annual Form 5500 filing. You handle the appraisal and any required audit through outside specialists.
In scope
What Accuplan handles.
Plan documents and amendments
We provide the ESOP plan document, the adoption agreement, and SECURE-related amendments as the law changes.
Recordkeeping and participant accounts
We track participant share allocations, vesting, contributions, and account balances year over year.
Form 5500 preparation
We prepare and file the annual Form 5500 with the IRS and Department of Labor.
Out of scope
What other specialists handle.
ESOPs need a few specialist roles that sit outside Accuplan's TPA service. Here is who handles each so there are no surprises.
Annual stock appraisal
A qualified independent appraiser sets the share price each year. The company hires the appraiser directly. We use the appraised value in participant statements and in the Form 5500.
ERISA fiduciary role
The plan trustee, who holds the shares for participants, is the company itself or an external 3(38) trustee. Accuplan does not act as the plan fiduciary.
Plan audit
ESOPs with 100 or more participants generally need an independent audit each year. The company hires the audit firm directly.
Repurchase obligation funding
When participants leave or retire, the company buys back their shares. Funding the repurchase is the company's cash-flow responsibility, not the plan's.
Talk it through
Set up time with an ESOP specialist.
ESOPs touch ownership, taxes, and succession at the same time. A 15-minute call can save weeks of back-and-forth on whether the plan fits your business.
Frequently asked
ESOP FAQs.
Who can sponsor an ESOP?
Any U.S. C-corporation or S-corporation. Sole proprietors, single-member LLCs, and partnerships generally cannot, because the plan needs corporate stock to hold. If your business is structured another way, ask us about a Solo 401(k) or SEP IRA instead.
Do all employees have to be covered?
Generally yes. ESOPs follow the same coverage and non-discrimination rules as other qualified plans, so most employees who meet the age and service thresholds in the plan document have to be eligible. The plan can require up to one year of service and an age of 21 before participation begins.
How are the shares valued?
For private companies, an independent appraiser sets the share price at least once a year. The valuation is the basis for contributions, allocations, and the price the company pays when it repurchases shares from departing participants. Accuplan does not perform the appraisal. The company hires a qualified appraiser separately.
Can older participants move out of company stock?
Yes. Once a participant reaches age 55 with at least 10 years in the plan, the plan has to let them diversify a portion of their account into other investments. The IRS standard is up to 25% in years one through five of the diversification window, rising to 50% in year six. IRS guidance on ESOPs covers the rule in detail.
When can a participant take a distribution?
Distributions usually begin the year after the participant retires, dies, or becomes disabled, and within five years of any other separation from service. Most plans pay out in equal installments over five years. Larger account balances over $1,455,000 for 2026 can be paid out over a longer period, up to ten years total. IRS Notice 2025-67 sets the 2026 thresholds.
What is the NUA tax election?
If a participant takes a lump-sum distribution of the actual company shares (not cash), they can elect Net Unrealized Appreciation treatment. The shares come out at their original cost basis and that piece is taxed as ordinary income. All the growth above cost is taxed later, when the shares are sold, at long-term capital-gains rates. For long-tenured participants, this can be the most tax-efficient way to take the money out. IRS Publication 575 covers the rules.
What if a participant takes the money before age 59½?
Distributions before age 59½ generally owe the standard 10% early-withdrawal penalty on top of regular income tax. Death, disability, and separation from service after age 55 are exceptions. A rollover into an IRA or new employer plan avoids the penalty entirely. The IRS Tax Topic 558 page lists every exception.
Can a participant roll over their ESOP balance?
Yes. A departing participant can roll over the cash value of their account into an IRA or a new employer plan and keep the tax deferral going. Or they can roll the actual shares into a brokerage IRA. Either approach skips the 10% early-withdrawal penalty. Read more on what to do with a terminated ESOP.
Does the company file an annual return?
Yes. ESOPs file an annual Form 5500 with the IRS and Department of Labor. Accuplan prepares the return as part of recordkeeping. Plans with 100 or more participants generally need an independent audit, which the company hires separately.
What about leveraged ESOPs?
A leveraged ESOP borrows money to buy a large block of shares up front, often from a retiring owner, and pays the loan back with future company contributions. They are common in ownership-succession deals. Accuplan administers non-leveraged ESOPs only. If you are exploring a leveraged structure, your transaction attorney and a specialist trustee will lead the design.
Keep reading
More on ESOPs and business retirement plans.
What to Do With a Terminated Employee Stock Ownership Plan
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What Happens to Your 401(k) After Quitting?
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Employee Stock Ownership Plan Pros and Cons
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Using Your 401(k) to Buy Real Estate
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How and When a Hardship Withdrawal Is Allowed in an IRA or 401(k)
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