Key Takeaways
- A KSOP is a combination of an employee stock ownership plan (ESOP) and a 401(k), offered by employers to their employees.
- KSOPs allow employees to invest in company stock while simultaneously saving for retirement.
- These plans can offer tax advantages but also come with the risk associated with concentrated investment in company stock.
- Employers may contribute company stock to the KSOP, adding to employees’ retirement savings.
- KSOP management is complex, often requiring professional administration for compliance with federal regulations.
What Is a KSOP?
A KSOP is a qualified retirement plan that combines an employee stock ownership plan (ESOP) with a 401(k). It is essentially an ESOP that operates within a 401(k). KSOPs are offered by employers to their employees.
Companies that offer these plans match employee contributions with stock rather than cash. KSOPs are considered defined-benefit plans because companies that offer them can reduce the administrative expenses of operating separate ESOPs and 401(k) plans. Primary advantages for employees include tax benefits and investment opportunities.
How a KSOP Works
Individuals have several options available to them when it comes to retirement planning. If their employer doesn’t offer a sponsored plan, they can choose to invest in accounts on their own, such as an individual retirement account (IRA). But most employers offer some type of retirement plan, such as 401(k)s or 403(b)s. Some companies may decide to offer what’s called a KSOP, in which an ESOP operates within a 401(k).
ESOPs are benefit plans that give employees an ownership stake in the company for which they work. These plans come with certain benefits, including no upfront costs. 401(k)s, on the other hand, are plans that allow individuals to set aside money from their paycheck for retirement.
Important
The benefits a retiree receives from a KSOP depend on how much they contribute, the employer contributions as well as the way the company’s share performs in the market.
The KSOP provides the features and benefits of both plans by combining them into one. Employees make contributions by setting aside a certain amount of money from their wages through regular payroll deductions. Employers make matching contributions. But rather than contributing cash, the employer instead offers shares in the company.
A KSOP is a great option for companies that can help them create a market for their shares with sufficient liquidity, which measures how easily a stock can be bought or sold in the market. They also incentivize employees to ensure the company’s profitability. This could boost the share price and generate additional value down the road. On the flip side, employees could lose value if the share price declines, leaving less incentive to outperform.
Key Considerations for KSOPs
KSOPs bring additional risk to plan holders above and beyond those associated with 401(k)s. Employees with traditional 401(k)s are generally offered several options of funds with various risk and reward profiles in which to invest. As employers gradually add to an employee’s 401(k), the employee has more money to distribute among these funds and diversify their assets.
There could be a variety of securities within a typical fund, including stocks, bonds, money market instruments, and cash. On the other hand, a KSOP concentrates employee assets in company stock, leaving less room for balance and spreading risk among different shares of stock and asset classes.
Comparing KSOPs to Other Employer Plans
There are other employer-sponsored retirement plans in addition to the KSOP, including the SEP IRA and the SIMPLE IRA.
Understanding SEP IRAs
SEP-IRAs are available for self-employed individuals, such as freelance writers, consultants, and independent contractors. They can also be set up by proprietorships and partnerships. Participants may make tax-deductible contributions on behalf of eligible employees, including the business owner.
Employers that establish SEP IRAs are allowed to claim a tax deduction for any plan contributions that are not over the statutory limit. However, annual contributions are optional, and if an employer does contribute, they must contribute the same percentage to all eligible employees, up to the contribution limit.
The contribution for a SEP IRA was the lesser of 25% of compensation or $69,000 for 2024.
Exploring SIMPLE IRAs
The SIMPLE in the name SIMPLE IRA stands for Savings Incentive Match Plan for Employees. This type of plan is geared toward slightly larger enterprises, including small businesses with 100 or fewer employees.
Employer contributions are mandatory. They have two options to help boost the retirement savings of their employees; either a 2% contribution or an optional matching contribution of up to 3%. In turn, employees could contribute a maximum of $16,000 in 2024. Individuals 50 and over can contribute an additional catch-up contribution of $3,500 each year.
What Are the Limits for a 401(k)?
The contribution limit for a 401(k) was $23,000 in 2024. If you are 50 and older, you can contribute an additional $7,500 in both years as a catch-up contribution. The limit is adjusted annually to keep pace with inflation.
What Are the Limits for an IRA?
In 2024, the contribution limit for an IRA was $7,000. If you were age 50 or over, you could contribute an additional $1,000.
Is a 401(k) Better or an IRA?
Generally, a 401(k) is better because it has higher contribution limits, no income qualifications like a Roth IRA, and most employers offer a matching contribution. However, 401(k)s are only offered by employers and not all offer them. If you don’t have access to a 401(k), then an IRA is a great alternative. Keep in mind that you can contribute to both a 401(k) and an IRA.
The Bottom Line
One of the most popular features of a 401(k) retirement plan is the matching contribution from an employer, which is essentially free money. A KSOP works in the same fashion but rather than the employer matching your contribution with cash, it matches with stock. This helps create liquidity in the market for the company’s stock as well as incentivizes employees so that the company does well and the stock price increases.