A leveraged ESOP enables the company to finance the purchase of company stock on behalf of employees, backed by the corporation's guarantee with the debt repaid out of future corporate earnings on a tax-deductible basis. Stock purchased by the ESOP trust is initially held in a suspense account and allocated to employees as the ESOP loan is repaid. As the ESOP loan is repaid, an equivalent portion of the unallocated shares is released from the suspense account and allocated to employee accounts according to a pre-established formula, usually based on salary.
Employees receive a distribution when they retire or leave the company.
You can find more information about the mechanics of the leveraged ESOP in our Entrepreneur's Guide to Equity Compensation , by visiting the Broad-based Equity Rewards section of our Employee Ownership Bookstore , and by reading ESOP compensation strategies in our Resource Library .