There are a number of tax incentives for corporations to consider an ESOP. We’ll go through how an employer might use tax-deductible monies to pay down ESOP debt and how tax-deductible cash distributions are advantageous.
The capacity of the employer to use tax-deductible monies to pay ESOP debt and the potential of deductible cash dividends to ESOP members are two of the many tax advantages driving ESOP development and expansion.
Allows C corporations to obtain a tax deduction for dividends paid on employee shares held by an Employee Stock Ownership Plan (ESOP) provided the dividends are used for specified purposes.
Dividends paid on a corporation’s own stock are generally not deductible. If the dividends are paid directly or through the ESOP within 90 days of the ESOP’s year-end; (b) at each participant’s option, paid to participations (directly or through the ESOP) or reinvested in employer stock; or (c) used by the ESOP to make fund payments on the loan used by the ESOP to acquire the employer stock, the company is entitled to a deduction for dividends.
All of these solutions have one thing in common: the payouts have to be affordable. If the Internal Revenue Service believes that legitimate dividend payments involve an avoidance or evasion of taxation, the deduction for such dividends may be denied.
To avoid the notification and consent regulations imposed on other distributions from eligible retirement plans, pass-through dividends can be distributed directly to participants or through the Employee Stock Ownership Plan (ESOP). For pass-through dividends, there is no withholding, and beneficiaries are taxed on these dividends at their ordinary income tax rates.
It is possible for participants to receive pass-through dividends on their total stock balances or their vested stock balances. It may be possible for a corporation to take a higher deduction with the former, but it entails cash payments to participants who have not yet vested in their stock. While it’s possible to deduct nonvested dividends from participant accounts (if there is an ESOP loan), it’s not possible to deduct dividends received on vested stock (if there is an ESOP loan).
Employees have the option of receiving a pass-through dividend or having their dividends reinvested in employer stock through the dividend reinvestment election. Aside from total stock balances, this election may be based solely on vested stock holdings. Any dividends reinvested in employer shares are fully vested if the election is based on the total stock balances. Nonvested shareholders receive the same treatment as those who elect pass-through dividends when they are paid in cash.
There should be careful attention given to whether cash dividends are to be automatically distributed, or if they are to be decided upon by the company’s board of directors or even the ESOP participants on an annual basis. Additionally, the plan document should lay out how dividends will be reinvested and how to make a pass-through/dividend reinvestment choice.
Pre-tax financing of ESOP transactions is greatly boosted by Section 404(k), which provides a deduction for the corporation when dividends are used to repay an ESOP purchase loan. It is not considered an annual addition for Section 415 testing (the test that restricts how much each member may earn under all the company’s qualified retirement plans) when dividends used to repay an ESOP loan are used.
ESOPs can additionally contribute up to 100% of employer contributions used to support interest payments on an ESOP acquisition loan; (b) 25% of eligible payroll for contribution used to make principal payments on the loan; and (c) an additional 25% of eligible payroll for all other employer contributions. A tax deduction can be earned from dividends in addition to those provided by employer contributions.
To take advantage of some of the deductions indicated above, in some situations, the corporation wants to do so without paying any dividends at all to shareholders who are not ESOP participants. If the ESOP buys convertible preferred stock, this can be done. If the corporation pays dividends into an Employee Stock Ownership Plan (ESOP), then the board of directors can continue to distribute dividends to ordinary shareholders at its discretion.
C corporations that sponsor ESOPs can benefit greatly from Section 404(k). The utilization of pre-tax money to service ESOP debt has made companies more attractive to lenders since they can more readily secure and successfully service an ESOP loan. Employees who participate in an Employee Stock Ownership Plan (ESOP) get dividends on their business stock, which is an immediate and attractive benefit for participants.
What is ESOP and how does it work?
Workers who participate in an Employee Stock Purchase Plan (ESOP) are given the opportunity to hold a stake in the company. It is up to the employer to decide who can take advantage of stock ownership plans that are offered as direct stock or profit-sharing plans or bonuses. Employee stock ownership plans, on the other hand, are nothing more than pre-exercise options that can be acquired at a predetermined price. In order to give Employee Stock Ownership plans to their employees, firms must follow the laws and restrictions laid out in the Companies Rules.
Are dividends from an ESOP taxable?
The early distribution excise tax does not apply to ESOP dividends paid directly to participants. Dividends are completely taxable, however they are not subject to income tax withholding.
How do ESOP payouts work?
Any combination of stock, cash, or both can be used to distribute your dividends to you. In many cases, ESOP participants leave with both stock and cash in their accounts. The money is going to be given to you in cash. It’s possible to sell some or all of the shares, so you’ll earn money for your money. Also, the corporation may hand you the shares, which you can sell back to the company within 60 days of receiving them for free at the evaluated market value. Once a year, if you think the value will rise, you can have another 60-day term (but there is no further right to sell after this). The payment can be made in a single payment, or in installments, over a period of time. You receive a portion of your dividends each year if you receive your shares in installments. From year to year, the value of the shares will fluctuate In the event that you quit and do not receive a payout immediately, your account balance can be retained in stock (meaning the value will fluctuate each year), cash, or a combination of the two.
Why is ESOP bad?
- In comparison to what, you might say that ESOPs are overly complex. Are ESOPs Really More Difficult Than Other Options for Selling a Business? stated, When it comes to selling to a new buyer, there are several variables that need to be taken into account. ESOPs, on the other hand, aren’t as complicated as they appear to be.
- The ESOP is unable to compete with other buyers’ bids: Instead of paying what an individual investor or private equity firm would, the ESOP is willing to pay what an assessor determines that a financial buyer would, such as a competitor or a private equity firm, pay. Outside buyers, on the other hand, typically pay a combination of cash and an earnout. The sale may also be contingent on financing or personal circumstances (such as earnouts or requiring the seller to stay or leave). Other purchasers are unable to provide the seller with the same tax deferral opportunity that the ESOP gives. Ownership Transitions: Employee Stock Ownership Plan (ESOP) Selling to a new buyer is just an option for a very tiny percentage of sellers, as compared to other options.
- Financial information and governance must be communicated to employees: There is no obligation to do so. In order to comply, companies are merely have to give annual statements detailing how much money is in an account, how long it has been in the account, and the stock’s worth. In the most successful ESOP enterprises, it is their choice to be “open book.” The board appoints a trustee to oversee the ESOP. In order for employees to get involved in management or corporate matters, the company must want them to.
- Employees can’t buy the company since they don’t have the money: In an Employee Stock Ownership Plan (ESOP), the company’s employees do not spend their own money to buy it. Corporate pretax contributions to the Employee Stock Ownership Trust (ESOP) are used to fund ESOPs. It’s possible to make annual cash contributions to acquire shares each year, or the trust can borrow money and have the firm contribute tax-deductible contributions to repay the loan.
- Employee stock options (ESOPs) are overly risky: At least at the beginning, ESOPs lack diversity. A 401(k) plan or any other type of retirement plan is not precluded by having an ESOP, however. These additional plans may be temporarily suspended from the company’s match or contribution, but employees are still able to contribute to them. In an ESOP, employees do not have to fork over any money for the shares, so they just take on the risk of any earnings. Employees can begin to diversify in long-term ESOPs.
- Only select industries benefit from employee stock ownership plans (ESOPs): ESOP companies can be found in almost every industry. For additional information, see ESOPs by the Numbers.
- An ESOP loan can’t be funded with bank credit because: Because of their low default rate, ESOP loans are more attractive to banks with specialized expertise than other types of high-leverage deals. However, if the seller does not have access to bank financing, the ESOP can pay an identical arms-length interest rate by taking a note on the transaction.
- It is essential for corporations to maintain repurchasing their own stock: this is especially true for closely owned businesses. Following the departure of ESOP participants from a privately owned firm, the company is legally required to ensure that the company or the ESOP repurchases the shares (or, less often, someone else). ESOPs, on the other hand, are much like any other privately held firm in that they have a 100% buyback duty at all times. The same holds true for employees who buy stock directly, such as in a management buyout. ESOPs repurchase in smaller chunks each year, unlike in other ownership arrangements, the company either seeks another buyer or liquidates when owners desire to sell.
- When it comes to their immediate financial needs, younger workers are more concerned than older workers about their long-term financial security: Employee reactions to company ownership are not influenced by demographics (e.g. age and seniority, education, income, and position).
- It’s possible that ESOPs can be difficult for employees to comprehend and appreciate if firms don’t put forth the effort to educate them. But if you do, they can be explained. Furthermore, if you establish an ownership culture in your firm, it will perform far better.
- ESOPs companies aren’t doing well: According to the evidence, the other way around is correct. Employee ownership has been shown to have a positive impact on a company’s financial performance. Two to three percent faster growth and reduced turnover and 2.5 percent higher productivity can be found in ESOP enterprises. Closely owned corporations don’t report their profits, so no actual numbers are accessible. However, there are several proxies that can be used as a substitute. The National Bureau of Economic Research has found that ESOPs have a strong correlation with economic growth. However, it isn’t a one-way street. Firms with a “ownership culture” — one in which financial information is shared and employees are encouraged to participate in work-level decisions — grow 6-11% a year faster than projected; firms with top-down cultures grow at a slower rate after implementing ESOPs. To put it another way, an ESOP only works when it’s a part of a larger corporate culture. Having a culture but not owning it isn’t a good strategy either.
What happens to ESOP when I quit?
It is possible to get the vested ESOP retirement benefits when an employee quits your company. The rest of the money is given to the corporation as compensation. Plan assets will not be drained by frequent employee turnover if a vesting schedule is in place. According to the National Center for Employee Ownership, you decided on a vesting timeline when you first created your ESOP. When a corporation loses non-vested benefits, it has two options: it can give them to the surviving employees, or it can cut its scheduled contribution for the following year.
Is ESOP good or bad?
One of the most common ways modern startup companies reward their early employees is through Employee Stock Option Plans (ESOPs). With Employee Stock Ownership Plans (ESOPs), several Silicon Valley companies like Google and Facebook have been able to entice top talent from the market. Because of these Employee Stock Option Plans (ESOP’s), there are now a number of multi-millionaires in the Silicon Valley area.
There is no guarantee that Employee Stock Option Plan (ESOP) will always be successful, however. In some circumstances, both the employer’s and the employee’s objectives are met. ESOPs, on the other hand, can cause a lot of headaches in many circumstances. We’ll take a closer look at the drawbacks of these ESOPs in this article. We’ll look at the drawbacks from both the company’s and the employees’ perspectives.
Employee Stock Option Plans (ESOP’s): Disadvantages Faced by the Company:
As a financial tool, Employee Stock Ownership Plans (ESOPs) are always sold as bringing democracy to corporations. Companies that implemented Employee Stock Option Plans (ESOPs) have seen significant growth as a result of an engaged workforce and a more democratic decision-making process. Furthermore, ESOPs enable for better financial management. Employees have the option of deferring lesser current payoffs in exchange for larger future payoffs. Employee Stock Ownership Plans (ESOP’s) also have significant tax advantages. Although it has its advantages, it also has its drawbacks. The following is a list of some of them.
- financial structure of the organization is made more complicated by Employee Stock Option Plans (ESOP). Raising new financing or equity for the business is extremely difficult because of the company’s existing obligations to its personnel. The tax advantages of Employee Stock Option Plans (ESOPs) are effectively wiped out by this additional complexity.
- Employees’ stock options must be purchased by the company if they elect to quit the company. The market price is typically used for this transaction. As a result, the company’s cash flow suffers whenever an employee leaves. Firms are forced to maintain large amounts of cash on hand as a result. To put it another way, there is a wasted opportunity cost to holding these cash on hand. During a downturn, the company’s workforce is more likely to leave. As a result, it’s possible that the company is already experiencing problems with cash flow at this time. The company’s cash flow situation could get much worse if it is required to purchase back ESOPs (Employee Stock Option Plans).
- Anecdotal data suggests that Staff Stock Option Plans (ESOPs) have a significant impact on employee morale and productivity. However, there are no hard facts to support this claim. This association has been disproved by empirical studies. Employee morale isn’t boosted by stock options alone, according to the study. For the workplace to be really democratic, they need to be able to have more influence.
Employee Stock Option Plans (ESOP’s): Disadvantages Faced by the Employee:
Employee Stock Ownership Plan (ESOP) multi-millionaires are an exception, not the rule. Employees that accept a big portion of their income in the form of Employee Stock Option Plans (ESOP’s) face a number of disadvantages. The following is a list of some of them.
- Employee Stock Option Plans (ESOP’s) have a high concentration of employee retirement funds invested in the company they work for, resulting in a lack of diversification. Workers who lose their jobs and insurance as a result of the company’s bankruptcy will also lose a significant portion of their retirement funds. Just like Enron, this is what happened. When it comes to stock ownership, it is expected that employees who are compensated through Employee Stock Ownership Plan (ESOP) have the same amount invested in the company’s stock as normal employees (k). In the case of individuals who are nearing retirement, this lack of variety can be extremely hazardous. In the event of a recession, a lack of diversification can leave employees broke.
- Because of Employee Stock Option Plan (ESOP) plans, workers who receive them have as much of an interest in a firm as its promoters. However, promoters have access to the company’s financial results. They are also entitled to make decisions. Because of this, it is possible for promoters to make decisions that are beneficial to them but detrimental to other shareholders, such as employees who own ESOPs. Neither the goals of the promoters nor those of the company’s employees are in sync.
- Although firms argue that Employee Stock Option Plans (ESOP’s) foster a democratic work environment, most companies do not grant employee shareholders voting rights in the company’s stock. As a result, there are two issues: There are two main reasons why shares that don’t have equal voting rights are less valued in the market. Secondly, the employees who possess these shares have no say in the company’s choices.
As a general rule, Employee Stock Ownership Plans (ESOP’s) do not provide as much value as they’re portrayed to. The Employee Stock Option Plan (ESOP) has a lot of problems that both parties need to consider before using it as a method of paying workers.
How do I avoid tax on ESOP?
Consider a rollover of your ESOP distribution to avoid tax and other penalties. Transferring tax-deferred money from an ESOP to another tax-deferred account like an IRA or 401(k) is known as a rollover (k).
Is ESOP better than 401k?
It is a frequently asked and politically significant subject whether employee stock ownership plans (ESOPs) are too risky to be an effective retirement plan for workers. Criticism has been leveled at ESOPs for their inability to diversify retirement funds because of their focus on company stock. As if that wasn’t bad enough, employees are tied to the same employer for both their wages and retirement savings. This is a reasonable concern, but it is based on an inaccurate assumption in the vast majority of situations. It is assumed that organizations having Employee Stock Ownership Plans (ESOPs) are replacing their ESOPs with a diversified retirement plan. That’s not what happened. ESOP companies are slightly more likely than non-ESOP companies to have additional retirement plans (including defined benefit plans). Many mature ESOPs, on the other hand, begin to diversify part of the plan’s assets as time goes on. As a result, in the vast majority of circumstances, the real choice is between non-ESOP participants with $X in varied assets and ESOP members with $X in diversified assets but with $Y in company stock as well. In reality, participants in ESOPs have significantly more money saved for retirement than non-participants. Furthermore, by their very nature, ESOPs are preferable to traditional 401(k) plans for employees with smaller incomes and those who are younger in age. Look at the following information:
- Employee Stock Ownership Plan (ESOP) contributions can be anywhere from 50 per cent to 100 per cent higher than those made in 401(k) plans, according to Department of Labor reports.
- 401(k) plans are mostly funded by employees. Under most cases, the company owns all of the assets in an Employee Stock Ownership Plan (ESOP).
- Department of Labor research demonstrates that in addition to having greater rates of return, ESOPs also have lower volatility.
- Workers, particularly those under the age of 40 and those with less money coming in, are better served by ESOPs than by 401(k)s.
- Secondary retirement plans are more common in ESOP businesses than in traditional corporations.
Can an employee receive dividends?
Providing employees with a portion of the company’s profits is an excellent way to inspire them. In fact, many large firms reward their workers with profit-sharing bonuses. This is what some people refer to as “Employees receive a “dividend.”
“Employees who worked for us for the entire year from January 1 to December 31 are entitled to a 2% share of the company’s net profit.
When our shareholders approved the payout of 2016 dividends, we recorded them as a profit distribution in 2017. Nevertheless, our auditors claim that this is incorrect and that it should be shown as an item in our 2016 profit or loss statement.
Answer: Are your employees acting in a capacity of a shareholder?
Many people ask this topic and believe that dividends are automatically accounted for in the financial statement.
The genuine distribution of profits, on the other hand, occurs when investors or shareholders transact.
In that case, you’re correct in assuming that the dividend is paid out to the shareholders.
As long as the dividend is proportional to the number of shares held by the employee, it is considered a profit distribution.
Because these payments are made as part of some compensation plan, dividends are not recorded in the equity statement as profit.
IAS 19 Employee Benefits governs this type of profit-sharing arrangement.
Only if the following two requirements are met should you recognize the estimated cost of profit-sharing:
- Such payments are legally or constructively due as a result of events that occurred in the past.
In other words, if you agreed in your employment contract to pay employees a “dividend,” if you have an agreement with your union, or even if your employees expect it as a matter of practice, then you have a current responsibility.
You must compute the amount of profit sharing and recognize it as a cost when you close the year-end, not when it is approved by shareholders and not as a distribution of profit via a statement of changes in equity.
Can you use ESOP to buy a house?
Loans must be available to all members in an employer’s Employee Stock Ownership Plan (ESOP), regardless of their position in the company. ESOP participants can take loans from their ESOP accounts for any purpose, as long as the limits are applied to all of the ESOP’s participants, such as paying for college expenses or the purchase of a property.
by Bret Keisling
ESOP-owned companies are not popular topics for conversation, but the current economic crisis brought on by COVID-19 has already led to the bankruptcy of well-known non-ESOP brands such as J. Crew and Neiman Marcus, with other well-known enterprises, such as Hertz rental vehicles, teetering on collapse. Some employee-owned businesses will fail in the present economic crisis, despite the fact that evidence suggests that ESOPs are more durable during a downturn.
Those employees who have accumulated company stock in their retirement accounts and are now at risk of losing all of their value if the company is dissolved could be devastated by this. ESOP participants who lose their jobs should not lose their retirement savings as a result of this, and we should reform the law to ensure this does not happen.
In a bankruptcy, the differences between ESOP participants and ordinary shareholders are critical.
Indeed, when a company goes bankrupt, it is not unusual for shareholders to lose all of their money invested in the company. Employees who are regarded as shareholders in an ESOP are likely to have the same results. The disparities between ESOP participants and other stockholders matter, especially in a bankruptcy.
Consider revisiting ESOP 101 for a refresher on a few terms. It’s common to refer to ESOP participants as “employee owners,” despite the fact that their status is more convoluted than direct ownership of stock. An Employee Stock Ownership Trust (ESOT) owns the company’s stock if a corporation sets up an Employee Stock Ownership Plan (ESOP) (ESOT). Even though we refer to ESOP participants as “owners,” they do not own any of the company’s stock. As an alternative, the trust holds the shares on behalf of “participants,” which are defined as anyone who is a part of the plan, such as current and past employees.
An ESOP participant account is established for each participant in accordance with the Plan. A participant’s annual account statement shows their ESOP account’s value as of the valuation date: the total number of shares given to them multiplied by the current market value of each of those shares. The “repurchase obligation” refers to the obligation to compensate participants. It’s common for ESOP plans to contain a vesting period of at least five years, however this can vary from plan to plan.
The main difference between ESOP members and ordinary shareholders is that ESOP participants are employees. As soon as an ESOP participant becomes vested, the firm owes them money, and if they fail to satisfy the repurchase commitment, the corporation will have serious problems with both the Department of Labor and the Internal Revenue Service.
An ESOP company’s outside shareholders (if the company is not a 100% ESOP) could lose everything in the case of bankruptcy, just like they would in a non-ESOP firm’s insolvency. Shareholders do not owe anyone money. The ESOP participants, on the other hand, may be able to claim as creditors. However, even if the obligation does not become “debt” until the participant leaves the organization due to a variety of reasons such as death or disability, it is inescapable that all participants will one day be forced to repay it.
Creditors who have secured debt get their money first, and creditors whose money hasn’t been spent get their money last. In the existing system, the obligation to repurchase is recognized as a form of debt.
ESOP participants who lose their jobs should not lose their retirement savings as a result of these changes.
For a variety of reasons, this is an issue. ESOP participants, on the other hand, often have no input in the construction of the trust, unlike most persons who become shareholders after making an investment. When they arrived at work, they were informed that the company had been taken over by its employees. A second benefit of stock ownership is the ability and right to sell. It is simple to sell shares in publicly traded corporations, but it is also possible to sell shares in privately owned companies. Participants in an employee stock ownership plan (ESOP) typically cannot sell any of their company stock before reaching retirement age.
Because shareholders acquire stock as an investment, they expect the value to rise or fall with time. ESOP members, on the other hand, buy stock as a way to benefit from the company’s success or failure. Instead of making investments, ESOP members receive shares that are designed for their future retirement. As soon as an ESOP participant’s stock vests, they should be able to count on their repurchase obligation being fulfilled, even if the company goes bankrupt.
Because bankruptcy courts treat ESOP members as secured creditors, Congress will have to approve legislation to make this move possible. ESOP trade groups should include this reform in their lobbying efforts. The estimated 17 million participants in ESOPs should be mobilized to meet with their representatives in Congress and other public leaders. It would take 17,000 ESOP participants (and hopefully voters) to write to Congress if just 1% of them did so. It’s possible that this type of grassroots communication might be useful in safeguarding ESOP members in a bankruptcy, but also in enacting an agenda to support and expand employee ownership in all its forms.
The ESOP Podcast is hosted by Bret Keisling.
He spent seven years as an ESOP trustee and two and a half years as the CEO of a 100% ESOP company prior to creating The Keisop Group in June 2019.
How much tax do you pay on an ESOP distribution?
It is possible to take advantage of certain tax advantages for plan members who receive plan distributions from eligible retirement plans, such as employee stock ownership plans (ESOPs). Stock dividends received from qualified retirement plans are eligible for favorable tax treatment under the Internal Revenue Code (IRC), and the difference might be substantial.
How It Works
Participants can roll over their distribution into an IRA or other eligible retirement plan in order to avoid taxation at the time of a distribution. Tax rates now ranging from 10% to 39.6 percent will apply if a member chooses to have the distribution paid directly to him or her in cash rather than through the plan. Because the stock dividends are paid directly to the recipient, they are taxed at lower rates than if they were received in cash or another form of payment. Net unrealized appreciation (NUA) is taxed only at long-term capital gains rates, which are currently 20% and generally lower than most participants’ ordinary income tax rates. Only the participant’s ordinary income tax rate is applied to the stock’s cost basis.
To calculate NUA, you must subtract the cost basis of the employer stock from its fair market value, then multiply that number by 100 to get the current value. The cost basis of shares purchased by a qualified retirement plan is the amount the plan paid for it. Stock provided by the plan sponsor has a cost basis of the fair market value at the time of contribution. The ESOP S-corporation stock’s cost basis must be changed annually in the same way as non-ESOP stockholders’ cost basis is adjusted. As part of their recordkeeping services, third-party administrators should be able to track and alter the cost basis in individual member accounts.
All distributions are not eligible for NUA tax treatment. Within one tax year, the member must receive a one-time lump-sum stock payment, and that distribution cannot be rolled over to another eligible retirement plan or IRA. A participant’s death, achievement of the age of 59 1/2, loss of work or disability must also trigger the distribution.
NUA Example Scenario
Using this example, we can see how NUA tax treatment can be applied and its importance. Assume that an ESOP participant buys 50 shares of stock at a cost of $100 each, resulting in a total cost of $5,000. When the ESOP participant has 50 shares worth $500 each, his or her total account value is $25,000 and the NUA is $20,000 ($25,000 total value minus $5,000 cost basis), the participant can elect a distribution. The participant is taxed at a rate of 30%.
The participant would have to pay $7,500 in taxes ($25,000 x 30%) and an extra $2,500 in early withdrawal penalties ($25,000 x 10%) if the payout were made in cash. It would be taxed at 30 percent if the distribution was paid in the form of shares and was not rolled over. The tax rate for the NUA would be 20%. ($5,000 x 30 percent) + ($20,000 x 20 percent) = $5,500 tax liability for the participant. Early withdrawal penalties of 10 percent would be levied on solely the cost basis of the shares ($5,000 x 10%, or $500) if the member is younger than 59 1/2. There are two ways to save money in this situation: $2,000 for those who are at least 59.5 years old, and $4,000 for those who are younger than 59.5 years.
A stock certificate isn’t necessary for most privately held ESOPs when making payments to participants. Cash and shares are typically exchanged within a few days of each other. Consequently, the tax treatment of NUA is available without a significant change in the distribution of the product. Although ESOP administrators should ensure that the distribution forms clearly state to participants that they are receiving a stock payout from the plan and promptly selling it back to the employer, this is not always the case in practice.
When a corporation sponsors an Employee Stock Ownership Plan, it can decide whether members will receive stock or cash distributions. In some cases, participants are given the option to choose between the two ways of distribution. Tax treatment for stock distributions should be studied and addressed with an attorney, accountant, and third-party administrator no matter who makes the decision.