What is a KSOP?
Because a KSOP is a combination plan, it has features of both ESOPs and 401(k)s. Companies can match contributions and reduce the expenses involved in running separate ESOPs and 401(k)s. KSOPs also indirectly create a marketplace for employees to sell their shares.
Most companies create KSOPs to provide the motivation, inspiration and retention associated with ownership. Like other defined contribution plans, the ultimate benefit to the employee depends on the amount contributed and the performance of the investments in the fund. KSOP participants and sponsors can enjoy some unique tax advantages, but when KSOPs issue new shares, they can dilute existing shareholders.
How Does a KSOP Work?
An ESOP is a defined contribution plan whereby the employer invests the fund assets in the employer’s stock. The employer's contributions are usually in the form of stock options to purchase shares of the company. Typically, in a KSOP the employer matches any contributions that employees make to the plan with stock instead of cash. So, if John Doe puts $500 into his KSOP account and the company offers to match contributions, the employer will put $500 of stock into John's KSOP account.
Why Does a KSOP Matter?
A KSOP is a defined contribution plan that is a combination of an ESOP and a 401(k).