Learn how you can use ESOPs, ESPPs and other profit-sharing and retirement vehicles to achieve more during your working years so that you can live out your retirement years in more comfort…
CAUTION: 20-minute read
Happy new year to all, and additionally a special happy birthday to my sister–love always…
In light of the current situation of many as it relates to employment or lack thereof; the creator of TheWealthIncreaser.com was forced to ask, what more can be done to help alleviate the economic concerns of those who were recently terminated, those who are currently employed, as well as those who desire to strike it out on their own and start a new business venture, or currently have a business; empowering insight on how they can achieve more in these turbulent times.
With the year 2026 coming into full bloom and 100’s of thousands of employees losing their job in 2025 across the United States, the creator of TheWealthIncreaser.com thought that the time was now to discuss retirement plans, and options for those who are creating businesses as well as those who are employed or anticipate employment in the near future, a real understanding of retirement options so that they could proactively plan for greater success during their working years, job transition period, retirement and golden years.
In this discussion TheWealthIncreaser.com will present profit-sharing and retirement options that you can possibly use to achieve more throughout your lifetime.
Public and private companies offer Profit Sharing and Employee Stock Ownership Plans that go by various names. In the subsequent paragraphs TheWealthIncreaser.com will discuss ESOPs, ESPPs and other ways that you can utilize retirement options to build wealth if you are now, or in your future at a company that offers them, or you desire to select a retirement plan for your own company that you now have or may decide to create at some point in your future.
Employee Stock Ownership Plans (ESOPs) provide a way for owners of public and privately held companies to create a succession plan by selling their shares to their employees via a retirement plan. ESOPs were created by Congress to encourage owners to sell to their employees–and both the sellers (employer) and their employees receive significant tax breaks and can be of real benefit to companies and their employees that have the means and insight to offer them or make the election to participate in them.
If you are part of a company that offers ESOPs you want to know your options on the front end so that you and your family can maximize the use to your advantage.
A renown publicly based company called Enron offered an ESOP plan (although not well managed) and went out of business in 2001 after years of astronomical growth in the 1980’s and 1990’s. Enron had a significant Employee Stock Ownership Plan (ESOP), which was a key part of its employee retention and retirement system, alongside a cash balance plan, but it was notoriously linked to massive losses when Enron collapsed, as the ESOP was heavily invested in company stock and used in a complex “floor-offset” arrangement that devastated employee savings.
A well-known private company that successfully offers employees stock ownership options is Publix (no pun intended), and they offer a significant Employee Stock Ownership Plan (ESOP) called the PROFIT Plan, where the company contributes shares to eligible employees’ retirement accounts at no cost, making it the largest employee-owned company in the United States with associates owning a large portion of the privately held stock through this plan and an Employee Stock Purchase Plan (ESPP).
An Employee Stock Purchase Plan (ESPP) is a company benefit that offers employees the opportunity to buy company stock, often at a discount (e.g., 5-15%), through automatic payroll deductions, making it a popular wealth-building tool for saving and investing in their own company’s success for those employees who are wise enough and are in position to effectively utilize.
Funds accumulate over an “offering period” (often 6 months) and are used to purchase shares on set “purchase dates,” sometimes at a lower price than the market price, and many have a “look-back” features that compare start and end prices–that can assist participants in determining whether to sell or hold the shares.
A stock bonus plan is a plan that allows distribution in employer stock!
ESOPs go a step further and “allows the plan to borrow” to purchase the securities. Even if the plan does not have to borrow, it can still be the right choice because it is subject to fewer legal restrictions, and it is considered a qualified plan.
An ESOP allows the same advantages as most stock bonus plans and also offer advantages that include the ability of the employer to borrow to provide contributions (leveraged ESOP where employer guarantees repayment of the loan, and the purchased stock is held as collateral), and the plan receives full proceeds immediately and “pays the loan off with the employer’s tax-deductible contributions” to the ESOP.
The collateralized stock is placed in a “suspense account” and the employer makes annual “tax-deductible contributions” to the plan and the proceeds from the deductibility are used to pay back the loan.
As the loan is paid, the stock is released from the suspense account, therefore the lender is not in suspense as to whether repayment will occur (LOL).
An ESPP (Employee Stock Purchase Plan) is a profit-sharing plan like an ESOP:
ESPPs can be categorized as qualified or non-qualified, with qualified plans offering tax advantages and requiring shareholder approval.
How it works:
Enrollment: Eligible employees sign up, usually during open enrollment periods.
Contribution: You choose a percentage of your paycheck (up to IRS limits, typically $25,000/year total) to contribute; the money is deducted after tax.
Accumulation: Funds build up over the offering period (e.g., 6 months).
Purchase: At the end of the period, the accumulated money buys stock at a discount (e.g., 15% off) from the market price on the purchase date, or sometimes the lower start or end price (look-back).
Selling: You can often sell the stock immediately (when publicly traded) for a guaranteed profit from the discount (taxed as ordinary income) or hold it for potential long-term capital gains and taxation at the capital gains or ordinary income rate.
Key Benefits:
Immediate Profit: A guaranteed return if you sell the discounted shares quickly.
Wealth Building: A structured way to save and invest in your company, enhances cash flow of employer because the distribution is cashless (stocks).
Convenience: Automatic payroll deductions make saving easy.
Ownership: Provides employees with a stake in the company which leads to better employee morale and retention.
Taxation: Provides delayed taxation of gain on stock distribution for employees.
Life Insurance: Many businesses use buy/sell agreement with life insurance to purchase stock upon the death of a key employee from the estate.
Key Considerations:
Risk: Overexposure to one company’s stock can be risky if the price drops.
Taxes: There are specific tax rules (qualified vs. non-qualified plans) that affect how gains are taxed.
Affordability: Ensure you can afford the reduced paycheck before enrolling (i.e. know your annual taxes, monthly cash flow and annual income and expenses prior to enrolling).
Marketability: Creates an immediate market for employer stock, even if stock is not publicly traded. Employees often cash in (take distributions) upon termination or retirement where stock is normally appreciated.
Disadvantages: There is always the possibility of stock price falling drastically (think ENRON) and negatively affecting employee retirement returns (balance). Code 401 (a)(28) provides some relief for those who qualify as up to 50% of account balance can be in other investments after 10 years and age 55, if option is elected in a timely manner and other technicalities are met.
Those at a company who own private shares do not have a ready market like those of public companies. The simplest solution for selling private shares in many instances is to approach the issuing company and ask how other investors liquidated their stakes. Some private companies have buyback programs, which allow investors to sell their shares back to the issuing company.
More on Retirement Plans
It is important that you realize that there are qualified and non-qualified retirement plans that you can possibly benefit from. If you plan to offer or your company currently offers retirement plans, you want to seriously consider the type(s) as they have the potential to help you build wealth more efficiently, particularly if they offer “a match feature” or provide you and/or your employees the “option to purchase shares” and particularly at below market price.
What is a qualified retirement plan?
A qualified retirement plan, is an employer-sponsored savings plan that meets IRS and ERISA rules, offering significant tax advantages like tax-deductible contributions and tax-deferred growth (taxes paid on withdrawal).
What is a non-qualified retirement plan?
A non-qualified retirement plan is an employer-sponsored savings plan, like a deferred compensation or executive bonus plan, that falls outside ERISA rules (Employee Retirement Income Security Act), making it more flexible but offering different tax benefits than typical 401(k)s and other qualified plans; they’re usually for top executives and highly compensated employees, allowing companies to provide extra retirement incentives beyond IRS limits.
Both plans will be discussed in greater detail below so that you can gain a better understanding and plan for your retirement in a more informed and confident manner:
Qualified plans are often employer sponsored and have tax advantages and are subject to code 401(a) that include:
- defined-benefit pension plans,
- cash-balance plans,
- Keough (qualified retirement plan for individuals),
- money purchase pension plans,
- target benefit plans,
- profit sharing plans,
- 401(k) plans,
- 403b plans,
- SEP/SIMPLE plans,
- solo 401k
- stock bonus plans,
- ESOPs, and
- ESPPs *(can be qualified or non-qualified)
More commonly talked about qualified plans include 401k, 403b, Thrift Plans and various pension plans.
RRB (Railroad Retirement Benefits) are governed by the Railroad Retirement Act, not ERISA. Social Security Retirement Benefits are a government provided pension and do not fall under ERISA.
A 403(b) is a type of qualified retirement plan (contrast with 457 plan), similar to a 401(k), that offers tax advantages for employees of public schools, certain tax-exempt (501(c)(3)) organizations, and churches, allowing them to save for retirement with pre-tax contributions and tax-deferred growth. While it functions like 401(k)s, 403(b)s have specific eligibility rules for employees and are governed by different IRS guidelines, though they provide similar powerful tax-deferred or Roth savings options.
The Thrift Savings Plan (TSP) is a defined-contribution retirement savings and investment plan (qualified) that offers Federal employees the same type of savings and tax benefits that many private corporations offer their employees under 401(k) plans.
By participating in the TSP, Federal employees and uniformed service members can save part of their income for retirement, receive matching agency contributions, and reduce their current taxes!
SEPs and SIMPLEs are also tax-advantaged plans that are of special appeal to business owners, and they too are “qualified plans” that fall under the IRS/ERISA act—Employee Retirement Income Security Act.
Non-qualified plans that include non-qualified deferred compensation and executive bonuses are also available as an option to aspiring or current business owners.
A key distinction that you must always know is before-tax contributions that are contributed on the employee’s behalf that are generally deductible with qualified plans “are not” available with non-qualified plans!
For Example: Let’s say you are in a corporation where you have the majority ownership of shares (business owner) and you have the option of taking an extra $40,000 as income or leaving the money in the corporation, and if your marginal tax rate was 37% and the corporate rate is 21%, you could save $5,400 in taxes by using a non-qualified plan–$8,400 owed on corporate income (that is not deductible by corporation but taxed at 21%) as opposed to $14,800 in taxes owed on personal income that is taxed up to 37% (keep in mind other technicalities apply).
Types of non-qualified plans:
- Deferred Compensation,
- Executive Bonus,
- ESPP *(can be qualified or non-qualified),
- Many others are often created that are non-qualified,
- ISOs (Incentive Stock Option),
- Phantom Stock Plans,
- RSOs (Restricted Stock Options),
- Golden Handshakes,
- Golden Parachutes,
- Incentive Pay,
- 457,
- SERPs,
- Split-Dollar Life Insurance (shared policy costs), and
- Group Carve-Out Plans
A non-qualified salary reduction plan has “no maximum deferral limits” and can be designed to “exclude rank and file employees” and that is one of the major reasons for the popularity in selection by many business owners.
Participation in a non-qualified plan is typically “restricted” to company executives. Disability, retirement age and death provisions and other technicalities must be met prior to or after setup with many plans.
SERPs (Supplemental Executive Retirement Plans) are “additional” non-qualified employer provided benefits in addition to qualified or non-qualified plan contributions that are offered by some companies.
Objectives of Non-qualified Plans:
- Provides alternative to qualified plan
- Provide second tier of benefits
- Cover limited group of employees
- Salary deferral for executives
- Instant benefit program for new company
- Meets wide range of compensation goals
- Satisfy special needs of specific employees
Non-qualified plans all offer tax-deferred growth but with less ERISA protection and creditor risk than qualified plans generally.
457 Plans are a non-qualified plan (contrast with 403b qualified plan) offered by government units, agencies, and non-church-controlled tax-exempt organizations that “do not pay federal income taxes” and are similar in concept to that of a 401k. Because federal taxes are not paid–deductibility by employer is not an issue, and because it does not fall under ERISA guidelines, no 10% early withdrawal penalty would apply if you were to withdraw prematurely.
457 plans offer tax deferral to employee participants, but with different creditor protections (governmental ones are protected, non-governmental ones aren’t) and specific withdrawal rules.
Be aware that tax-exempt entities can also sponsor qualified plans, SEPs, and SIMPLEs etcetera, in most instances.
Executive-Bonus Life Insurance
An Executive-Bonus Life Insurance plan can be used instead of (or in addition to) qualified or non-qualified plans mentioned above. The corporation would pay a bonus to the executive for the purpose of purchasing cash-value life insurance.
The executive is the policyowner, the insured, and the person who designates the beneficiary. Corporations can pay premiums directly or pay executives and executive would then pay premiums.
The corporation “deducts” and includes the amount of the payment in the executives W-2 taxable income. Since it is W-2 income, federal, state and local taxes would apply as well as FICA, and to offset that taxation some companies offer “Double-Bonus Plans” to help alleviate the added tax burden of the executive or recipient.
A buy-sell agreement is a legally binding contract between business owners that dictates what happens to an ownership share if an owner leaves due to a “triggering event” (like death, disability, divorce, or retirement).
A buy-sell agreement ensures business continuity, prevents outsiders from gaining control, and provides a predetermined method (often using life insurance or disability policies) for buying out the departing owner’s interest, establishing the price and terms to avoid disputes.
Group Carve-Out Plans are executive benefits offering key employees enhanced, portable permanent life insurance (like Universal Life) which is separate from standard group term life, providing cash value growth, post-retirement coverage, and supplemental income, all designed to attract and retain top talent by overcoming limitations of typical group plans, like limited coverage amounts and lack of portability after leaving.
These non-qualified plans let employers select participants (executives, top performers etcetera) for superior benefits, allowing cash value accumulation and continued coverage post-employment, unlike basic group term insurance that ends when you leave.
A Rabbi Trust plan will pay benefits even if hostile takeover occurs. Assets remain subject to claims of creditors. A Rabbi Trust is typically used by a company to provide its senior executives with additional benefits to their existing compensation package, and a Rabbi Trust does many things, but it doesn’t keep creditors at bay. If a company goes under and declares bankruptcy, the funds in a Rabbi Trust can be used by creditors.
Similar in approach to a Rabbi Trust in that it is designed to prevent the takeover by outside forces. A Secular Trust represents a non-qualified deferred compensation (NQDC) arrangement designed to provide executive benefits with the highest degree of security. A Secular Trust is an irrevocable trust established by an employer to hold assets for the exclusive benefit of one or more highly compensated employees.
Its primary function is to legally separate the deferred funds from the employer’s general operating capital!
A Secular Trust is protected from employer’s general creditors. A Secular Trust is structured as an irrevocable trust, meaning the employer, known as the grantor, “cannot reclaim the assets” once they are contributed.
The trust agreement dictates that the assets are held for the exclusive benefit of the designated employee-beneficiary!
This legal separation of the funds from the employer’s general assets is the core mechanism that provides the employee with financial security.
A surety is a promise or agreement “made by one party” that debts and financial obligations will be paid!
In effect, a surety acts as a guarantee that a person or an organization assumes responsibility for fulfilling financial obligations in the event that the debtor defaults and is unable to make payments.
The party that guarantees the debt is referred to as the surety or the guarantor. This relationship is different from insurance, which is a two-party relationship that only protects against specific risks.
Sureties often involve issuing surety bonds and they are legal contracts that require one party to pay if the other doesn’t fulfill the agreement!
Key Points About Surety Bonds
- Surety bonds involve a three-party agreement consisting of the principal (responsible for fulfilling the obligation), the obligee (requires the assurance), and the surety (guarantor of the bond).
- When claims are made against surety bonds, the principal is obligated to repay the surety for any compensation paid, distinguishing it from traditional insurance where the insurer absorbs the financial loss.
- Surety bonds provide both “assurance” to the obligee that obligations will be met and “can lower risk” for lenders, potentially leading to reduced interest rates for borrowers.
- Unlike a bank guarantee or insurance policy, a surety bond does not protect the principal against loss but holds them accountable for their commitments, ensuring transparency and accountability.
- Surety bonds are commonly used in industries such as construction and government contracts to ensure contract fulfillment and reduce financial repercussions for incomplete projects.
Funding non-qualified plans creatively with life insurance is yet another option.
NOTE: Always realize that with all plans, technicalities apply and you want to be aware of the fine print and terms as they can change yearly. You want to understand the terms and other technicalities proactively as opposed to after plan setup or election for receiving benefits, so that you better control your future and attain the outcomes that you desire.
IRAs—both Traditional and/or ROTH are yet another type of retirement savings vehicle that although not qualified under current guidelines, offer significant benefits and could offer you a helpful path toward retirement if you qualify. IRAs allow you to put up to $7,000 ($8,000 a year with catch-up provision for 2025 tax year)—assuming you have no better options (and you qualify) to save toward retirement so that you can live out your retirement years with more dignity.
Solo 401ks and SEP IRAs offer yet another opportunity for retirement savings for those who qualify. Solo 401ks allows contributions from both an employee and an employer. That is, if you have a solo 401(k), you wear both hats and can make contributions in both roles. The contribution limits are adjusted for inflation every year by the IRS, and people age 50 and older can add an extra a “catch-up contribution.”
A SIMPLE IRA is ($16,500 contribution limit with $3,500 additional contribution allowed for those age 50 or over–total $20,000–and $5,250 for those age 60 to 64 or over–total $21,750) yet another option for those who qualify.
A SEP IRA may also be appropriate for business owners as there is a higher contribution limit (25% of an employee’s compensation or $69,000 for tax year 2024) than that of a SIMPLE IRA, Traditional or ROTH IRA.
Annuities are also utilized by some who save for retirement and even those who are already retired. You want to know prior to election if annuities can be of benefit to you based on your goals, risk-level. income, and personal situation and generally you don’t want to invest more than 40% of your retirement funds in annuities. Annuities are often sold by insurance companies; however, a portion is eventually taxed upon withdrawal depending on whether it is a return of principal or earnings.
Annuities come in many types including:
- Immediate Annuity
- Deferred Annuity
- Variable Annuity
- Registered-Index Linked Annuity
- Fixed Index Annuity
- Many others
When you start receiving payments, you will owe income taxes on “previously untaxed withdrawals” at your ordinary income tax rate for the year you receive the payments. If you were to “sell your annuity” you would be taxed on the gain portion and not the principal, generally.
The taxable part represents earnings and any tax-deferred contributions you make. Therefore, the portion that represents a return of principal is not taxed unless it was placed in the annuity on a pre-tax basis. The tax rate that applies to annuity payments depends on your tax bracket.
You would receive a form 1099-R during the tax season and if you were to withdraw early you would be subject to a 10% early withdrawal penalty if you received a distribution and you were under age 59 1/2.
Conclusion
When it comes to retirement selection, whether you are a business owner or an employee, you want to choose wisely and put yourself and your family on a path to living at the level that you desire during your retirement years—not below what you desire!
That improved living that you desire (or need to attain) during your retirement includes knowing your “retirement number” that you need to reach in advance, whether you are a business owner or an employee.
You can “propel the time that you reach your retirement number” by taking advantage of employer matches and maximizing your retirement contributions at the highest level possible based on your goals, risk tolerance, monthly income and personal situation.
You want to skillfully select stock options and other bonuses that you qualify for or are offered by your company!
You also want to understand investment basics and retirement basics prior to your retirement planning when possible!
Even if you lack the time or inclination to do your own planning, or you feel that now is not the best time for you to make your dreams come true, you will be in better position than most when you meet with financial professionals and others throughout your lifetime by “proactively analyzing your finances and wealth building activity” so that you can go where you need to be.
And if you act proactively and take the necessary steps that make the most sense for your personal situation (properly analyze your goals, risks, income and personal situation) you won’t have to be too concerned about the so called “new rules of retirement” as you will have already addressed “your amount needed” to live out your retirement years comfortably over your forecasted lifetime, the amount you need to invest in stocks/bonds and other investments over your lifetime, the amount that you can withdraw monthly over your lifetime that fits your desired lifestyle and takes inflation and taxes into account–along with your total monthly income that you need to have over your remaining life that can make your life more enjoyable.
By knowing prior to implementing your retirement plan, your cash flow position, including your annual income, asset position, liability position—and knowing in definite terms that your self-worth is far more important than your net worth when you are in the process of building wealth—you better position your heart and mind to achieve the success that you desire and deserve from this day forward in all facets of your financial life.
And even though you must be concerned about your retirement and what lies ahead, you don’t want to let worry and other distractions of the heart and mind dominate your thoughts in a detrimental way. For those who are now unemployed or underemployed, you want to find new creative ways to use your gifts, skills, and talents and have the needed confidence so that you sincerely love what you are doing so that you will be positively received by others.
When there is no room for you (what appears to be unjustified job termination or any other unjustified action against you where the door is closed), you may have to create your own room. You want to have a plan A, B, and C from this day forward–and realize that on occasion you may have to go back, in order to move forward, therefore you never want to let setbacks be a deterrent to your ultimate success.
By facing adversity and responding appropriately, you will have developed the discipline and determination to reach or exceed your goals, and you will be focusing on your future in a more financially alert manner so that you can achieve more throughout your lifetime.
Also realize that if you are at this time clearly able to “distinguish” between a qualified and non-qualified retirement plan, you put yourself ahead of many money managers and financial planners in some respects, however the point is you must be able to use that distinction for your and your family’s best interest–not financial advisors, other companies, operatives and scammers who may not have your, your company’s or your family’s best financial interests in mind.
Whether you are a business owner or aspiring business owner, you want to analyze your or your company’s potential tax position with the “profit sharing and/or retirement plan that you are considering proactively” as some plans are deductible by the employer, and some are not and many have nuances that must be analyzed accurately prior to selection to be of most benefit to you or your company. Additionally, if you are an employee or soon to be employee, you want to be aware of taxation of gains at retirement or some point in your future (deferral of gain). In most cases taxation will be at your ordinary income or capital gains rate. And always realize that inflation will raise its ugly head on an annual basis, therefore it is your responsibility to know this on the front-end and plan accordingly.
If you are now a business owner, aspiring business owner, employee, or looking for work at this present time, it is the desire of the creator of TheWealthincreaser.com that this discussion has empowered you with some added insight on what you can do to work toward making your dreams come true.
All the best to your profit-sharing portion of your nest, and pursuing your retirement number and other goals at a level that sincerely allows you to rest…
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