KSOP: What It Means, How It Works, Other Options

What Is a KSOP?

A KSOP is a qualified retirement plan that combines an employee stock ownership plan (ESOP) with a 401(k). It is essentially an ESOP that operates within a 401(k). As such, KSOPs are offered by employers to their employees.

Companies that offer these plans match employee contributions with stock rather than cash. KSOPs are considered defined-benefit plans, as companies that offer them can reduce the administrative expenses of operating separate ESOPs and 401(k) plans.

How a KSOP Works

Individuals have several options available to them when it comes to retirement planning. If their employer doesn't offer a sponsored plan, they can choose to invest in accounts on their own, such as an individual retirement account (IRA). But most employers offer some type of retirement plan, such as 401(k)s or 403(b)s. Some companies may decide to offer what's called a KSOP, in which an ESOP operates within a 401(k).

ESOPs are benefit plans that give employees an ownership stake in the company for which they work. These plans come with certain benefits, including no upfront costs. 401(k)s, on the other hand, are plans that allow individuals to set aside money from their paycheck for retirement.

The KSOP provides the features and benefits of both plans by combining them into one. Employees make contributions by setting aside a certain amount of money from their wages through regular payroll deductions. Employers make matching contributions. But rather than contributing cash, the employer instead offers shares in the company.

A KSOP is a great option for companies that can help them create a market for their shares with sufficient liquidity, which measures how easily a stock can be bought or sold in the market. They also incentivize employees to ensure the company's profitability. This could boost the share price and generate additional value down the road. On the flip side, employees could lose value if the share price declines, leaving less incentive to outperform.

Special Considerations

KSOPs bring additional risk to plan holders above and beyond those associated with 401(k)s. Employees with traditional 401(k)s 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.

There could be a variety of securities within a typical fund, including stocks, bonds, money market instruments, and cash. On the other hand, a KSOP concentrates employee assets in company stock, leaving less room for balance and spreading risk among different shares of stock and asset classes.

KSOPs vs. Other Employer-Sponsored Plans

There are other employer-sponsored retirement plans in addition to the KSOP, including the SEP IRA and the SIMPLE IRA.

SEP IRA

SEP-IRAs are available for self-employed individuals, such as freelance writers, consultants, and independent contractors. They can also be set up by proprietorships and partnerships. Participants may make tax-deductible contributions on behalf of eligible employees, including the business owner.

Employers that establish SEP IRAs are allowed to claim a tax deduction for any plan contributions that are not over the statutory limit. However, annual contributions are optional, and if an employer does contribute, they must contribute the same percentage to all eligible employees, up to the contribution limit.

The contribution for a SEP IRA is the lesser of 25% of compensation or $66,000 for 2023 and $69,000 for 2024.

SIMPLE IRA

The SIMPLE in the name SIMPLE IRA stands for Savings Incentive Match Plan for Employees. This type of plan is geared toward slightly larger enterprises, including small businesses with 100 or fewer employees.

Employer contributions are mandatory. They have two options to help boost the retirement savings of their employees; either a 2% contribution or an optional matching contribution of up to 3%. In turn, employees can contribute a maximum of $15,500 in 2023 and $16,000 in 2024. Individuals 50 and over can contribute an additional catch-up contribution of $3,500 each year.

The Bottom Line

One of the most popular features of a 401(k) retirement plan is the matching contribution from an employer, which is essentially free money. A KSOP works in the same fashion but rather than the employer matching your contribution with cash, it matches with stock. This helps create liquidity in the market for the company's stock as well as incentivizes employees so that the company does well and the stock price increases.