Definition of Employee Stock Ownership Plan (ESOP) trust

type of benefit in which an employee obtains shares of stock in the company, the amount normally determined by the employee's level of compensation. ESOP acts as a leverage tool through which the business is able to obtain a source of capital. The procedure is for a lender (usually a bank) to lend money to the ESOP. The ESOP then takes the borrowed money to buy stock from the company's treasury. In the meantime, the ESOP has signed a note with the lender for the borrowed funds with the stock pledged as collateral for the loan, and the business has guaranteed repayment if the ESOP fails to do so. The stock held in the ESOP is allocated to each employee as the business pays its contributions into the ESOP. The ESOP uses the company's contributions to repay the loan and the interest thereon. The contributions per employee that the company makes into the ESOP are tax deductible, and they are not taxable to the employee until the benefits are received.