What Are Salary Reduction Plans and Employee Stock Ownership Plans?

Other types of qualified plans allow employees to contribute money from their salaries into the plans. For example, an employer may offer a salary reduction plan. In a salary reduction plan, employees elect a certain percentage of their salary to be deposited into an investment account. The amount that is deposited is tax-deferred until it is withdrawn. Employees choose from several investment options. Contribution limits and eligible participants differ depending on the type of plan. Examples of salary reduction plans are 401(k) plans and 403(b) plans.

An employee stock ownership plan (ESOP) is an employee benefit plan that allocates company stock to employees. In an ESOP, a company sets up a trust fund and then contributes shares or cash to the fund. The company can borrow money to buy more shares, paying the loan back with contributions to the trust. As the loan is paid back, shares are allocated to employee accounts from the trust. ESOPs are also qualified plans.

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