What Is a KSOP?
Let me explain what a KSOP is directly: it's a qualified retirement plan that merges an employee stock ownership plan (ESOP) with a 401(k). Think of it as an ESOP running inside a 401(k) framework, something employers provide to their workers.
If you're an employee, your company might offer this, matching your contributions with stock instead of cash. I see KSOPs as defined-benefit plans because they help companies cut down on the costs of managing separate ESOPs and 401(k)s.
Key Takeaways
- A KSOP is a qualified retirement plan that combines an employee stock ownership plan (ESOP) with a 401(k).
- Companies that offer these plans match employee contributions with stock rather than cash.
- KSOPs are defined-benefit plans as companies can reduce the administrative expenses of operating separate ESOPs and 401(k)s.
- There are lower upfront costs associated with KSOPs.
- KSOPs bring additional risk to plan holders above and beyond those associated with 401(k)s.
How a KSOP Works
You have various choices for retirement planning. If your employer doesn't provide a plan, you can go solo with something like an individual retirement account (IRA). But most employers do offer plans, such as 401(k)s or 403(b)s. Some take it further with a KSOP, where an ESOP functions within a 401(k).
ESOPs give you, the employee, a stake in the company you work for, with perks like no initial costs. Meanwhile, 401(k)s let you deduct money from your paycheck for retirement savings.
Here's something important: the benefits you get from a KSOP as a retiree hinge on your contributions, what your employer adds, and how the company's stock performs in the market.
A KSOP blends the best of both worlds into one plan. You contribute by deducting from your wages regularly. Your employer matches, but they do it with company shares, not cash.
For companies, a KSOP is practical—it creates a market for their shares with good liquidity, meaning stocks are easy to buy or sell. It also motivates you to drive company profits, potentially raising the share price and building value over time. But if the stock drops, you might lose out, reducing your drive to excel.
Special Considerations
KSOPs add extra risk for you beyond a standard 401(k). In a typical 401(k), you get options for funds with different risk levels to invest in. As your employer contributes, you can spread that money across funds to diversify.
Those funds might include a mix of stocks, bonds, money market tools, and cash. A KSOP, however, focuses your assets heavily on company stock, limiting diversification and increasing exposure to one asset.
KSOPs vs. Other Employer-Sponsored Plans
Beyond KSOPs, you might encounter other employer-sponsored retirement plans like the SEP IRA and SIMPLE IRA.
SEP IRA
SEP-IRAs suit self-employed folks like freelance writers, consultants, or independent contractors. They're also for proprietorships and partnerships. You can make tax-deductible contributions for eligible employees, including yourself as the owner.
If you set up a SEP IRA as an employer, you claim a tax deduction for contributions up to the limit. Contributions are optional yearly, but if you make them, it's the same percentage for all eligible employees, capped at the limit.
The limit is the lesser of 25% of compensation or $66,000 for 2023 and $69,000 for 2024.
SIMPLE IRA
SIMPLE IRA means Savings Incentive Match Plan for Employees, aimed at small businesses with 100 or fewer employees.
Employers must contribute: either 2% or a matching up to 3%. You, as an employee, can put in up to $15,500 in 2023 and $16,000 in 2024. If you're 50 or older, add a $3,500 catch-up each year.
What Are the Limits for a 401(k)?
For a 401(k), the limit is $22,500 in 2023 and $23,000 in 2024. If you're 50 or older, add $7,500 as a catch-up in both years.
What Are the Limits for an IRA?
IRA limits are $6,500 in 2023, rising to $7,000 in 2024. For those 50 and up, an extra $1,000 in both years.
Is a 401(k) Better or an IRA?
A 401(k) is generally superior with higher limits, no income restrictions like Roth IRAs, and often employer matches. But they're employer-provided, and not all offer them. If you lack a 401(k), an IRA works well. You can contribute to both.
The Bottom Line
One key appeal of a 401(k) is the employer match—free money. A KSOP does the same but matches with stock, not cash. This builds liquidity for the company's stock and encourages you to help the company succeed, boosting stock prices.
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