The Employee Stock Ownership Plan concept was developed in the 1950s by lawyer and investment banker Louis Kelso, who argued that the capitalist system would be stronger if all workers, not just a few stockholders, could share in owning capital-producing assets. But, few companies took up Kelso's ideas because an ESOP’s authority to borrow money to buy stock for participants was based on IRS rulings and had no clear statutory authorization.
In 1973, Kelso convinced Senator Russell Long, Chairman of the tax-writing Senate Finance Committee, that tax benefits for ESOPs should be permitted and encouraged under employee benefit law. Soon, federal legislation promoting ESOPs appeared, most importantly the Employee Retirement Income Security Act of 1974 (ERISA), which governs employee benefit plans and established a statutory framework for the Employee Stock Ownership Plan.
In the following years, the number of ESOPs expanded dramatically now that sharing ownership was in the economic self-interest of company owners. From time to time since then, Congress has modified the laws governing ESOPs, most notably in the Tax Reform Acts of 1984 and 1986, the Small Business Job Protection Act of 1996, the Taxpayer Relief Act of 1997, and the Economic Growth and Tax Relief Reconciliation Act of 2001.
Today there are about 11,500 ESOPs in place covering over 10 million employees. 401(k) plans, by contrast, cover about half this amount. ESOPs are found in publicly traded and closely held companies of every size, however, most ESOP-owned companies have 15 or more employees, with a median of roughly 100 employees.
Like the common 401(k) and profit sharing plans, an ESOP is a tax-qualified retirement plan governed by ERISA. Technically, an ESOP is a stock bonus plan qualified to borrow money. Yet, unlike other qualified plans, ESOPs are required to invest primarily in the stock of the plan sponsor.
