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Hospital Employee Stock Ownership Plans

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A Qualified Retirement Plan


By Dr. David Edward Marcinko; MBBS MBA CMP™

The growth over the past few decades of plans that give hospital and other corporate employees a stake in the ownership of their company has been a significant development in the area of employee compensation and corporate finance.  

Though there are many forms of hospital employee ownership, the employee stock ownership plan (ESOP) has achieved widespread application.

The rapid growth in the number of ESOPs being created has important ramifications for employees, corporations, healthcare industrial complex and economy at large. 

ESOP Definition 

An ESOP is a special kind of qualified retirement plan in which the sponsoring employer establishes a trust to receive the contributions by the employer on behalf of participating employees.  The trust then invests primarily in the stock of the sponsoring employer.

The plan’s fiduciaries are responsible for setting up individual accounts within the trust for each employee who participates, and the company’s contributions to the plan are allocated according to an established formula among the individual participants’ accounts, thus making the employees beneficial owners of the company where they work.  

ESOPs Must be in Writing 

Like all qualified retirement plans, ESOPs must be defined in writing.  

Further, in addition to the usual rules for qualified deferred compensation plans, ESOPs must meet certain requirements of the Internal Revenue Code [IRC] with respect to voting rights on employer securities. 

In general, employers that have “registration class securities” (publicly traded companies) must allow plan participants to direct the manner in which employer securities allocated to their respective accounts are to be voted on all matters.

Companies that do not have registration class securities are required to pass through voting rights to participants only on “major corporate issues.” These issues are defined as merger or consolidation, re-capitalization, reclassification, liquidation, dissolution, sale of substantially all of the assets of a trade or business of the corporation, and, under Treasury regulations, similar issues.  

On other matters, such as the election of the Board of Directors, the shares may be voted by the designated fiduciary unless the plan otherwise provides.

In regard to unallocated shares held in the trust, the designated fiduciary may exercise its own discretion in voting such shares. 

Motivating Factors 

As owners, physicians, nurses, and hospital employees may be more motivated to improve corporate performance because they can benefit directly from company profitability. A growing company showing significant increases in the value of its stock can mean significant financial benefits for participating employees.  

Employee Risk 

However, because the assets of the ESOP trust are invested primarily in the stock of one company, there is a higher degree of risk for the employee. 

IRC Code § 401(a) 

Until January 1, 2003 the employee did not incur FICA tax on exercised stock options. ESOPs, like all qualified deferred compensation plans, must meet certain minimum requirements spelled out in Code § 401(a) in order for the contributions to be tax deductible to the sponsoring employer.  

Many employers who set up ESOPs do so not to take advantage of the very substantial tax incentives they can receive, but rather to provide their employees with a special kind of employee benefit—one with many implications for the way a company does business.


An ESOP is the only employee-benefit plan that may also be used as a technique of corporate finance.  

Thus, in addition to the usual tax benefits of qualified retirement plans, studies have shown that ESOPs provide employers with significant amounts of capital, which often result in financial benefits far superior to other employee-benefit plans, while employees can share in the benefits realized through corporate financial transactions.  And so, are you familiar with ESOPs and do you participate in them, when available? Why or why-not? Please comment on your experiences. 


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Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com


Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™  Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™



One Response

  1. The Peril of Employee Stock Purchase Plan

    When I was in California last week, I met with a prospective client and did a second-opinion financial reviewof his situation. He has $5mm in his company’s ESPP (employee stock purchase plan.) I can’t help but feel a bit dizzy, that feeling you get when you’re standing on the edge of a tall building without any protection.

    I have a friend who was a senior engineer at MCI Worldcom. He also participated in this company’s ESPP. In only a few years, Worldcom went from being a no-name, little known company to acquiring the second largest telecom at the time – MCI, and its stock price went up tenfold. The value of my friend’s ESPP account went from $300k to over $3mm and he looked extremely smart by not diversifying at all.

    The rest of the story you all know. MCI Worldcom filed for chapter 11 in 2002 due largely to corporate fraud committed by their executives. Its stock price plummeted to zero and my friend lost every dime in his ESPP.

    So what exactly is an ESPP?

    An ESPP enables a company employee to purchase company stock through payroll deduction. These kind of plans are very popular among high-tech companies because they are considered a very effective way to align the interests of the employees and the firm.

    A typical ESPP usually allows an employee to purchase company stock at a discount of up to 15% to 20%, and requires the employee to hold the stock for at least one year. After a year, the employee is allowed to diversify.

    But few diversify, much to their financial peril. Here are the common reasons they don’t:

    1. Inertia. Most people just have this deep-seated status quo bias. If things ain’t broke, why change? Payroll deduction is automatic, but to diversify the employee would actually need to create another brokerage account, move their company shares there and sell them and buy other stocks or funds. This is just too much work for comfort.

    2. Affinity. Most people also have a deep-seated affinity bias. They are familiar with the company, they like their colleagues, so they also like the company stock. It may be subconscious, , but they don’t want to sell their stocks, since selling feels like separating.

    3. Overconfidence. Since they work for the company, they think they know everything about the company. They feel as though they are in control, therefore a concentrated position doesn’t feel as risky to them.

    4. Capital gain tax. Since shares are purchased at a discount, when they are sold, capital gains taxes have to be paid. Many people would rather not pay taxes.

    All of these are not good reasons not to diversify. You may think that since you work in the company, you are on top of things. Well, my friend who worked for MCI Worldcom thought so as well. So did those employees who worked for Enron and Lehman Brothers and lost everything.

    You don’t know what you don’t know. If you’ve read this far, you probably have a pretty sizeable ESPP. Do me a favor, take this tiny step: put a date on your calendar to diversify your concentrated position. This little nudge might just be enough to help you overcome your inertia bias.

    Michael Zhuang
    [Principal of MZ Capital Management]


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