An Employee Stock Ownership Plan (ESOP) is a defined contribution pension plan invested chiefly in the company that sponsors it, and permits employees to share in the growth of the company and the benefits of equity ownership. Such plans acquire shares of the employer corporation through contributions of the employer to the plan.

In a noncontributory ESOP, the employer usually contributes its shares to a trust and receives a deduction for the fair market value of the stock.

Generally, the employee recognizes no income until the stock is sold after distribution to him or her when he or she retires.

Like 401(k) plans, each ESOP participant has an individual account, which is credited annually with some of the discretionary contributions (cash or company stock) based on the employee’s compensation.

An ESOP does not offer “the investment flexibility” of conventional 401(k) plans, which normally carry many stock investment alternatives. The employee’s length of service and the profitability of the company determine the benefits of ESOP participation to the worker.

The same QDRO laws govern the ESOP as traditional defined contribution plans, such as 401(k)s and profit-sharing plans. Most ESOPs permit participants to take their distributions upon retirement or termination, so the QDRO provides the alternate payee with the right of immediate distribution when the QDRO is approved.

Any pre-marital balance is not considered marital property. This means that gains/losses on the premarital portion must be excluded from any portion being conveyed to the alternate payee.

ESOPs have vesting schedules. This means that the worker’s ownership increases as his or her tenure with the company grows. The participant becomes full vested over a schedule. The alternate payee should receive a percentage of the participant’s total account balance or the marital share at the time of the divorce.

The tax treatment of payments and distributions from an ESOP is the same as those for a traditional defined contribution plan. As a rule, ESOP income is tax-deferred until the actual distributions are made.