An ESOP is a qualified defined contribution plan that is either a stock bonus plan, or a combination stock bonus and money purchase plan, that invests primarily in your employer's securities. Generally, this is common stock issued by your employer that is traded on an established securities market.

An ESOP may use employer contributions to buy common stock from the controlling stockholders if the price reflects the value of the stock in the open market.

One of the key aspects of an ESOP is its ability to borrow to acquire employer securities — a so-called exempt loan — and its ability to use plan assets to repay an exempt loan. As a participant in an ESOP, you will be entitled to direct the plan as to how you want securities allocated to your account voted.

Another important feature of these plans is your right, each year, to direct the plan as to the investment of at least 25 percent of your account balance once you've reached age 55 with at least 10 years of plan participation. This “diversification of investments” election permits older employees to select investments suitable for their anticipated retirement.

If you should leave your employment, an ESOP distribution rule accelerates the date when benefits begin. ESOP benefit payments must begin no later than one year after the end of the plan year when you separate from service on account of retirement or disability, or one year after the end of the plan year that is the fifth plan year following separation from service from some other cause.

Since these rules are meant to speed up the date benefits begin, if benefits would begin sooner under the distribution rules applicable to all qualified plans, then that would override the ESOP rules.

For 2009, the limit on contributions to defined contribution plans, including contributions to the ESOP on your behalf, are limited to the lesser of $49,000 ($46,000 in 2008) or 100 percent of compensation.

However, certain forfeitures and payments of interest on loans to the ESOP will not be taken into account in calculating these limits, which may have the effect of increasing amounts that go into your account.

Once you're entitled to a distribution from the ESOP, you will have the right to take your benefits in the form of your employer's securities, with certain exceptions. The right to receive employer securities will not extend to that portion of your account which you elect to have reinvested under the diversification rules mentioned above.