DEFINITION of 'KSOP'

A KSOP is a qualified retirement plan that combines an employee's stock ownership plan (ESOP) with a 401(k). Under this type of retirement plan, the company will match employee contributions with stock rather than cash. KSOPs can benefit companies by reducing expenses that would arise by separately operating an ESOP and 401(k) retirement plans.

BREAKING DOWN 'KSOP'

A KSOP is a great option for companies that can help them create a market for their shares with sufficient liquidity. In addition, KSOPs also provide added motivation to employees to ensure the profitability of the company. In turn, this could boost share price and generate additional value for the employees and firm.

In contrast, if company shares are not performing well, the cycle could become vicious, with employees losing value as share price declines, leaving less incentive to outperform.

In contrast with traditional 401(k) retirement plans, KSOPs bring an added level of risk to employee portfolios. In a traditional 401(k), employees are generally offered several options of funds with various risk and reward profiles in which to invest. As employers gradually add to an employee’s 401(k), the employee has more money to distribute among these funds and diversify their assets. Within any particular fund there are usually a variety of stocks, as well as bonds, and sometimes money market instruments and cash. A KSOP concentrates employee assets in company stock, leaving less room for balance and spreading risk among different shares of stock and asset classes.

KSOP and Additional Forms of Employer-Sponsored Retirement Plans

In addition to the KSOP, there are additional forms of employer-sponsored retirement plans, including the SEP IRA and SIMPLE IRA. A SEP IRA is available for self-employed individuals, such as freelance writers, consultants, independent contractors, along with sole proprietorships and/or partnerships. SEP IRA participants may make tax-deductible contributions on behalf of eligible employees – including the business owner, and the employer is allowed to claim a tax deduction for any plan contributions that are not over the statutory limit. Annual contributions are optional; however, if an employer does contribute, she or he must contribute the same percentage to all eligible employees, up to the contribution limit.

In contrast, a SIMPLE IRA is often appropriate for slightly larger organizations. Small businesses with 100 or fewer employees are eligible. "SIMPLE" stands for “Savings Incentive Match Plan for Employees.” Employers that establish a SIMPLE plan may make a mandatory 2% retirement account contribution to all employees or an optional matching contribution of up to 3%. In turn, employees can contribute a maximum of $12,500 annually in 2018.

RELATED TERMS
  1. Employee Contribution Plan

    An employee contribution plan is an employer-sponsored savings ...
  2. Qualified Acquisition Cost

    Qualified acquisition cost includes IRA withdrawals that constitute ...
  3. Excess Accumulation Penalty

    Excess accumulation penalty is due the IRS when a retirement ...
  4. Nonperiodic Distribution

    Nonperiodic distribution is a one-time, lump-sum payment of an ...
  5. Redeposit

    Redeposit is the requirement to reinvest money into a retirement ...
  6. Employee Stock Ownership Plan - ...

    An employee stock ownership plan is a qualified defined-contribution ...
Related Articles
  1. Financial Advisor

    Beware Of Company Stock In Qualified Plans

    While this strategy does have a few advantages, it can also pose some substantial risks to employees.
  2. Retirement

    Best Retirement Plan Options for the Self-Employed

    Self-employed business owners can choose from any of these retirement plan options.
  3. Retirement

    Benefits Of A SIMPLE IRA

    If you're at a small company, you may be offered a SIMPLE IRA retirement plan. Contribution limits are lower, but vesting is instant, with other benefits.
  4. Retirement

    Retirement Savings Tools I: Employer Savings Plans

    There are a variety of employer savings plans that can offer multiple routes to saving for retirement.
  5. Retirement

    SIMPLE IRA Vs SIMPLE 401(k) Plans

    See the differences that may cause an employer to choose one plan over the other.
  6. Small Business

    Deferred Compensation Plans for Small Business Owners

    Find out the best tax-qualified options business owners can use to defer their compensation and accumulate capital for their retirement.
  7. Retirement

    Hey Self-Employed, Are You Making The Most Of Your Retirement Options?

    Even if you own your own business, it is still very important to save for retirement, and to understand your options for doing so.
Trading Center