If the ESOP borrows money, however, the situation is more complicated. One approach is to project how much will be needed so that the value of the shares released each year is the same as the amount employees defer. In either case, many companies will increase their matching percentage if the stock is replacing a cash match. The lower risk of a cash match is compensated for by the larger amount of the stock match. The loan is then structured so that most of the principle is paid off towards the end of the term.
Companies can prepay on the loan, however, to meet the exact amount employees defer.
In some cases, this could change the number of years over which the loan is actually paid. These loans may need to have substantially similar terms. However the plan is structured, companies need to decide whether to use the repayment amount of the contributions or the value of the stock allocations to test for meeting discrimination rules. This issue is not yet a settled area of the law and should be discussed with legal counsel. All rights reserved.