KSOP

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KSOP: What it is and how it works

A KSOP combines an employee stock ownership plan (ESOP) with a 401(k) into a single qualified retirement plan. Employers match employee 401(k) contributions with company stock instead of cash, creating a vehicle that delivers features of both ESOPs and 401(k)s while reducing the administrative burden of running two separate plans.

How it works

  • Employees contribute to their retirement through payroll deductions (as with a 401(k)).
  • The employer makes matching contributions of company shares rather than cash.
  • Over time, employees accumulate retirement value based on their contributions, employer stock allocations, and the market performance of the company’s shares.
  • KSOPs can help create a market for the company’s stock by increasing liquidity and can align employee incentives with company performance.

Benefits

  • Combines 401(k) and ESOP features in one plan, simplifying administration.
  • Lowers some upfront costs compared with running separate plans.
  • Encourages employee ownership and engagement, which can boost company performance and stock value.

Risks and special considerations

  • Concentration risk: KSOP participants often hold a significant portion of their retirement in company stock, reducing diversification compared with typical 401(k) plans that offer multiple fund options (stocks, bonds, money-market instruments).
  • Market risk: Retirement outcomes depend heavily on company performance. If the company’s stock declines, employees’ retirement balances can suffer materially.
  • Liquidity considerations: KSOPs are most practical for companies able to provide sufficient liquidity for their shares.

How a KSOP compares with other employer-sponsored plans

SEP IRA

  • Designed for self-employed individuals and small businesses.
  • Employers may contribute tax-deductible contributions for eligible employees.
  • Employer contributions are optional; if made, they must be the same percentage for all eligible employees.
  • Contribution limit: the lesser of 25% of compensation or $66,000 (2023) / $69,000 (2024).

SIMPLE IRA

  • Geared to small businesses (generally 100 or fewer employees).
  • Employer contributions are mandatory: either a 2% nonelective contribution or a matching contribution up to 3%.
  • Employee contribution limits: $15,500 (2023) / $16,000 (2024).
  • Catch-up contribution for those 50 and over: $3,500.

Contribution limits (high-level)

  • 401(k) employee deferral limits: $22,500 (2023) / $23,000 (2024). Catch-up for 50+ of $7,500 in both years.
  • IRA contribution limits: $6,500 (2023) / $7,000 (2024). Catch-up for 50+ of $1,000 in both years.

401(k) vs. IRA (brief)

  • 401(k) advantages: higher contribution limits and often employer matching contributions; no income-based eligibility restrictions like some Roth IRAs.
  • IRA advantages: available to anyone (subject to tax rules) even without employer-sponsored plans.
  • You can contribute to both a 401(k) and an IRA if eligible.

Key takeaways

  • A KSOP is a combined ESOP and 401(k) where employer matches are made in company stock.
  • It can reduce administrative costs and promote employee ownership, but it increases concentration and market risk for participants.
  • Consider plan specifics, diversification options, and company financial health before relying heavily on a KSOP for retirement savings.