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In what context do employer contributions apply to the loan principal in an LESOP?
They are restricted to 10% of employee salaries
They can be up to 25% of covered compensation
They are limited to fixed annual amounts
They cannot be applied to purchase stock
The correct answer is: They can be up to 25% of covered compensation
In a Leveraged Employee Stock Ownership Plan (LESOP), employer contributions that apply to the loan principal are significant because they enhance the overall capacity of the plan to finance the purchase of stock. The correct context here is that these contributions can amount to up to 25% of covered compensation. This percentage reflects the regulatory allowance within the structure of LESOPs, enabling the employer to make substantial contributions that support both the repayment of the loan taken out to acquire shares and the future funding of the plan. This mechanism is designed to ensure that the employees can benefit from equity ownership while the company also enjoys a tax-advantaged way of transitioning ownership. By allowing contributions of this nature, the LESOP effectively leverages funds that may improve employee engagement and provide better retirement outcomes. The other contexts presented do not accurately capture the provisions surrounding employer contributions to the principal of an LESOP loan and do not align with established regulations.