Account Segregation and Vesting in ESOPs

Employee stock ownership plans (ESOPs) may allow the stock portion of terminated participants’ accounts to be converted to cash and invested in nonstock assets prior to payout. This approach is commonly referred to as account segregation, account conversion, or reshuffling. Companies often employ this strategy to make sure only active employees (those who affect the stock’s value) hold the company stock in the ESOP, to prevent terminated participants from sharing in the risk and return associated with company stock after they no longer have an effect on value, to manage their repurchase obligation, or for a combination of any or all of these reasons. Companies must tread lightly, though, as account segregation could violate plan document provisions and Internal Revenue Code (IRC) regulations if not done properly.