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.
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