Employee Stock Ownership Plans 66 Many private companies require you to sell the stock back to the ESOP, the company, or another shareholder. You can put the cash into an IRA and use it to buy stock in a publicly traded company, buy some other type of security, or leave it in cash. Dividends Companies often use dividends as a way to provide some immediate return to the employees and to keep them involved with the ESOP. ESOPs offer some special advantages to you and the company when it comes to dividends. The company can pay the dividend directly to you and deduct the cost. Under normal circumstances, dividends are not deductible to the company. You receive the dividend on stock held in trust for you--stock you did not pay for and don't owe any taxes on at this point. The dividend, however, is taxable as ordinary income. The good news is the 10 percent early withdrawal penalty doesn't apply and the company is not obligated to withhold taxes. The more stock you accumulate over the years, the dividend "bonus" becomes more valuable. The idea is to make it attractive for you to stay with your employer. ESOPs as an Investment Anytime you can gain an asset for free, it's a good deal. That's the reason ESOPs are so popular with employees. Unfortunately, you can get too much of a good thing. It is never wise to have all your investments in one stock even if it costs you nothing. There have been too many stories where companies have gone out of business and their stock became worth- less. When this happens to an ESOP company, no stock held by the trust or workers who have left or retired is worth anything. If you haven't made other investments to fund your retirement, you could be looking at a very bleak situation. Some companies offer other retirement plans in addition to ESOPs, such as 401(k) programs that allow you to choose the investment vehicle for your retirement funds. Be careful not to "double dip" by buying company stock in another retirement plan while you are accumulating shares in the ESOP. Caution Investment professionals caution that having more than 10 percent of your retirement port- folio in a single stock is not wise. The rules governing ESOPs recognize this danger and provide for some relief for people who have been in the plan for 10 years or more and who have reached age 55. During the next five years, these employees can diversify up to 25 percent of the stock acquired by the ESOP. The ESOP must supply some alternative investment vehicles or hand over stock or cash to the employee. Check with your ESOP trustee for specifics of your plan. Timing ESOP participants have very little control over the plan except through the administrator of the trust. Most of the procedures are set and operate without any input from you. Unlike options, you have little control over what happens or when. One area you may have some influence over is timing of ESOP distributions. If you are planning to leave the company or retire and have some latitude about when those events are going to occur you may be able to help yourself.