How Does a Stock Bonus Plan Work?

A company's chances for success increase when it hires and retains well-qualified, dedicated employees. As part of the goal of keeping its best employees happy, companies may design attractive benefits packages. Often, benefits packages include tools that help employees plan for retirement. A stock bonus plan represents a viable way an employee may accumulate wealth for the retirement years.

A stock bonus plan allows employees to share in a company's success. With this type of plan, a company contributes stocks to an account held on behalf of its employees in an effort to help them accumulate assets for retirement. Often, these plans are used as a substitute for profit-sharing contributions, providing employees with an ownership stake in the company. The stocks granted to an employee through a stock bonus plan are not considered part of his wages. Instead, they are categorized as employee benefits intended to make a job more appealing and encourage an employee to do his best.

A company typically establishes a trust that holds the shares contributed to this type of plan. The plan keeps a record specific to each employee eligible for stock bonuses and allocates shares as instructed by the employer to each employee's account. The employee usually receives the shares she is awarded when she retires. If she dies prior to the distribution of shares, the employee's beneficiaries receive them instead. In addition, an employee may usually receive her stock distribution if her employment is terminated prior to retirement.

From an employee's perspective, the main benefit of a stock bonus plan is the chance to have his wealth grow along with the company's. As a company grows more profitable, the value of its stock typically rises as well. After working for a company for many years, an employee involved in this type of plan may realize large profits and gain significant money toward retirement. The employer does not have to make a contribution if it has a poor financial year. It may deduct contributions from taxable income.

Stock bonus plans don't translate into a guaranteed amount of money for an employee. Stock values can fall, leaving the employee with shares of little value. Also, these plans do not allow for diversification. If an employee has company stock as her only investment, she may face a disadvantage when planning for retirement. In the event the company performs poorly, the employee may receive little-to-no money from the plan when she retires. The requirement to buy distributed stocks back at an employee's request can be considered a disadvantage for employers. For example, an employee may request that her employer repurchase the stocks she receives upon retirement. If the stocks are traded publicly, however, employers do not have to purchase them.

Employees who receive shares of a company through a stock bonus plan typically have the right to vote with other shareholders regarding the company's operations. Employees also have the right to receive dividends and timely distribution upon retiring or leaving the company for other reasons. Companies must provide distribution within a year of an employee's retirement date or the date on which an employee dies or becomes disabled. In addition, an employer must provide distribution within five years of an employee's termination date.