Penalty for Early Withdrawal From ESOP

by Justin Johnson ; Updated July 27, 2017
ESOP participants should know all tax implications when withdrawing from an ESOP.

An Employee Stock Ownership Plan, or an ESOP, is a form of retirement plan whereby the employer places shares of company stock into an account for employees. This plan places a portion of ownership of the company in the hands of the employees. Certain rules and regulations govern how money is withdrawn from the ESOP.

Early Withdrawal (Cash Out)

An employee may withdraw all or a portion of funds from of their ESOP account at any time. As a result of doing so, the employee will incur a 10% excise tax (penalty) on the amount of money that was withdrawn, in addition to accruing normal income tax on the proceeds.

Rollover to IRA

ESOP participants can choose to transfer, or rollover, the funds in their ESOP account to an Individual Retirement Account (IRA). Federal tax law provides that no taxes will be assessed on funds rolled over to an IRA from an ESOP. The tax will be incurred when the money is withdrawn from the IRA at a later date as ordinary income.

Dividend Payouts

Employee Stock Ownership Plans often pay a cash dividend to the plan participants. These cash dividends are taxable as ordinary income at the time of disbursement. The cash dividend will likely not have taxes withheld, as they are exempt from tax withholding. There are no early withdrawal penalties applied to a cash dividend.

About the Author

A southeastern Ohio native, Justin Johnson is a finance professional with accounting and financial planning experience in various manufacturing industries. He discovered a love for writing as student at Pensacola Christian College and after learning many lessons in the workplace, he enjoys writing business and finance pieces.

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