Employee stock ownership plans (ESOPs) allow employers to contribute company stock to provide for their employees' retirement. While Congress intended ESOPs to remain intact until retirement, employees can draw from their ESOP accounts during times of hardship.
An employee must be vested, or have worked for his company for a specific time period, to be able to draw upon his ESOP funds. A fully vested employee is entitled to his ESOP's full value, but one who quits before becoming fully vested is only entitled to a partial distribution.
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The IRS usually assesses an additional 10 percent tax on ESOP distributions drawn by an employee before she turns 59 and 1/2 years of age, but waives this penalty if she draws the funds due to financial hardship. Expenses that qualify as financial hardship include medical, funeral, tuition and expenses incurred to prevent foreclosure.
Hardship Distribution Consequences
An employee may not invest money into a retirement plan for six months after collecting a hardship distribution from his ESOP account. While an employee doesn't pay a tax penalty on the hardship distribution, he's still liable for the standard tax on retirement income.
- Congressional Research Service: Individual retirement Accounts and 401(k) Plans: Early Withdrawals and Required Distributions
- United States Department of Labor: FAQs About Pension Plans and ERISA
- The National Center for Employee Ownership: ESOP Vesting, Distribution and Diversification Rules
- U.S. Securities and Exchange Commission: Employee Stock Ownership Plans (ESOPs)