ESOP Repurchase Obligation Liability

The put option requirement exists because otherwise, employees receiving closely held company stock would likely be stuck with it or at best might sell it at a discount, thus frustrating a prime purpose of having ESOPs in the first place: to spread the benefits of ownership to employees.

In many cases, the ESOP, not the company itself, repurchases the shares. This is a common practice, but the company may not force the ESOP to do so.

Due to the financial impact of repurchasing shares, it is important to forecast the repurchase obligation. There are several ways to finance it, such as prefunding it, paying dividends, and so on, and repurchased shares can be redeemed by the company or recirculated in the ESOP. There are specific legal requirements affecting repurchases, such as distribution and diversification requirements, account segregation, and valuation.

The main factors that determine the timing and size of the repurchase obligation are:

• The percentage of the company's total shares held by the ESOP (i.e., fewer shares equals less of an obligation).
• The value of each share (more value means a higher obligation).
• The timing and form of ESOP distributions (for example, can some distributions be delayed until the ESOP loan is repaid?).
• How many allocated and vested shares there are (e.g., if an ESOP loan is being repaid quickly, there will be more allocated shares and thus more potentially eligible for repurchase).
• Employment, demographics, and actuarial characteristics of participants (e.g., are there are many employees who will retire soon and require distributions?).
• Diversification issues (participant ages, time in the plan, and diversification elections, plus the plan's diversification rules, will affect repurchases).
• Form of distribution (whether shares are repurchased and retired vs. recontributed to the ESOP or recontributed later will affect future obligations).
• Account management options such as segregation and rebalancing (changing the mix of stock and cash, etc., affects repurchases).
• Acquisitions (if the company acquires a company and adds its employees to the ESOP, that increases the repurchase obligation).
• Major corporate events (e.g., if 20% or more of participants are laid off in a 12-month period, causing a partial termination and thus 100% vesting for them).
• External events such as recessions or stock market changes (these can affect valuations and thus the size of the obligation).

2023 Repurchase Obligation Survey Results

The report on our 2023 ESOP repurchase obligation survey describes distribution practices, diversification policies, confidence about the respondents' ability to meet their obligations, and other issues. We received 248 valid responses from companies. Most were in manufacturing, professional services, or construction, reflecting the predominance of such industries among ESOP companies. Annual contributions as a percentage of payroll averaged 11.7%. The median percentage of outstanding shares repurchased in the most recent fiscal year was 5%, with the average being 6%. Eleven percent repurchased 0%, and 17% repurchased more than 10%. The full survey results are covered in a 72-page report.

Repurchase Obligation Resources

These and other issues are discussed in The ESOP Repurchase Obligation Handbook, 5th Ed. You also can delve deeply into our survey data on how companies are dealing with the repurchase obligation (discussed in a chapter in the book) by obtaining our repurchase obligation survey report. And if you're an NCEO member, watch our live and replay webinars on the repurchase obligation and related topics. If you're not a member, consider joining.

Naturally, repurchase obligations come up for discussion in our other publications, from general ESOP overviews like Understanding ESOPs to specialized books like Sustainable ESOPs and The Fiduciary's Guide to ESOP Valuation, where the repurchase obligation is one of the factors affecting the topic at hand.