Step 3: Allocate Shares

Overview

Step 3 allocates shares from the pool (determined in Step 2) to eligible participants, applying eligibility rules and ERISA caps.

This is where participants actually receive their annual allocation of ESOP shares based on their compensation.

Core Responsibilities

Eligibility Determination

Identify which employees qualify for allocation

Pro-Rata Allocation

Distribute shares proportional to eligible compensation

ERISA Compliance

Apply compensation and annual addition caps

Multi-Class Distribution

Allocate across multiple securities in proper proportions

Processing Phases

Phase 1: Determine Eligibility

Employees must meet all three criteria to receive allocations:

is_eligible = (
    employee.age >= eligibility_age              # e.g., 21
    AND employee.service_years >= eligibility_service_years  # e.g., 1.0
    AND employee.hours_worked >= eligibility_min_hours       # e.g., 1000
)

Example:

Eligibility Age: 21
Eligibility Service: 1 year
Eligibility Hours: 1,000 hours/year

Employee A: Age 35, 5 years service, 2,080 hours → ✅ Eligible
Employee B: Age 22, 0.5 years service, 2,080 hours → ❌ Not eligible (service)
Employee C: Age 24, 2 years service, 800 hours → ❌ Not eligible (hours)

Every employee gets an eligibility evaluation event in the compliance log, regardless of outcome.

Phase 2: Calculate Eligible Compensation

Apply the ERISA Compensation Cap (IRC §401(a)(17)):

Compensation Capping
Why Cap Compensation?

max_compensation = 345_000  # 2025 ERISA limit (adjusts annually)

for employee in eligible_employees:
    if employee.compensation > max_compensation:
        capped_compensation = max_compensation
        # Log compensation cap event
    else:
        capped_compensation = employee.compensation
    
    total_eligible_compensation += capped_compensation

Example:

Employee A: $80,000 comp → capped at$ 80,000 (under limit)
Employee B: $250,000 comp → capped at$ 250,000 (under limit)
Employee C: $400,000 comp → capped at$ 345,000 (over limit) ⚠️

Total eligible comp =

80K +

250K +

345K =

675,000

Phase 3: Allocate Shares

Shares are distributed pro-rata by eligible compensation:

for employee in eligible_employees:
    allocation_ratio = employee.capped_compensation / total_eligible_compensation
    shares_to_allocate = total_share_pool * allocation_ratio

Example Allocation:

Employee	Compensation	Capped Comp	Ratio	Share Pool	Allocation
A	$80,000	$80,000	11.85%	5,000	593 shares
B	$250,000	$250,000	37.04%	5,000	1,852 shares
C	$400,000	$345,000	51.11%	5,000	2,555 shares
Total	$730,000	$675,000	100%	5,000	5,000 shares

Notice Employee C’s allocation is based on

345K, not their actual

400K compensation.

Phase 4: Apply Annual Addition Cap

ERISA Annual Addition Limit (IRC §415):

Maximum value that can be added to an employee’s account in a year: $69,000 (2025 limit).This includes employer contributions, forfeitures allocated, and certain other additions.

Cap Enforcement
High Share Price Impact
Multi-Class Capping

max_annual_addition = 69_000  # 2025 ERISA limit

for employee in eligible_employees:
    allocation_value = shares_to_allocate * share_price
    
    if allocation_value > max_annual_addition:
        # Scale down allocation to cap
        shares_to_allocate = max_annual_addition / share_price
        
        # Log annual addition cap event

Example:

Share Price: $500
Employee C allocated: 2,555 shares
Value: 2,555 * $500 =$ 1,277,500 ⚠️ WAY OVER

Capped Allocation:

Max value: $69,000
Capped shares: $69,000 /$ 500 = 138 shares
Employee C receives: 138 shares (not 2,555)

In multi-class mode, cap is applied to the combined value across all securities:

# Calculate total value across all securities
total_value = 0
for security_id, quantity in allocations_by_security.items():
    security_price = securities[security_id].current_share_price
    total_value += quantity * security_price

# If over cap, scale down ALL securities proportionally
if total_value > max_annual_addition:
    scale_factor = max_annual_addition / total_value
    for security_id in allocations_by_security.keys():
        allocations_by_security[security_id] *= scale_factor

Example:

Class A allocation: 50 shares @ $600 =$ 30,000
Class B allocation: 100 shares @ $400 =$ 40,000
Total value: $70,000 (over$ 69K cap)
Scale factor: $69,000 /$ 70,000 = 0.9857

Scaled Allocations:

Class A: 50 * 0.9857 = 49.29 shares
Class B: 100 * 0.9857 = 98.57 shares
New total: $68,996 ✅

Multi-Class Allocation

When multi_class_mode=True, allocations are distributed per security:

Determine Per-Security Pools

From Step 2, each security has its own share pool:

share_pool_by_security = {
    "CLASS_A": 3_000.0,  # shares available
    "CLASS_B": 2_000.0   # shares available
}

Allocate Each Security Pro-Rata

for employee in eligible_employees:
    allocation_ratio = employee.capped_comp / total_eligible_comp
    
    for security_id, pool_quantity in share_pool_by_security.items():
        employee_allocation[security_id] = pool_quantity * allocation_ratio

Apply Annual Addition Cap

Calculate combined value and scale if necessary

Update Employee Holdings

for security_id, quantity in employee_allocation.items():
    if not employee.holdings.get(security_id):
        employee.holdings[security_id] = Holding()
    employee.holdings[security_id].shares += quantity

Example Multi-Class Allocation:

Employee	Comp Ratio	Class A Pool	Class A Alloc	Class B Pool	Class B Alloc
A	20%	3,000	600	2,000	400
B	35%	3,000	1,050	2,000	700
C	45%	3,000	1,350	2,000	900

Data Flow

Inputs

From Step 2
Plan Rules
ERISA Limits
Employee Data

{
  "total_shares_for_pool": 5000.0,           # Single-class mode
  "share_pool_by_security": {                # Multi-class mode
    "CLASS_A": 3000.0,
    "CLASS_B": 2000.0
  }
}

{
  "eligibility_age": 21,
  "eligibility_service_years": 1.0,
  "eligibility_min_hours": 1000
}

{
  "max_compensation": 345_000,      # §401(a)(17)
  "max_annual_addition": 69_000    # §415
}

{
  "employee_id": "EMP001",
  "age": 35,
  "service_years": 5.0,
  "hours_worked": 2080,
  "compensation": 125_000.0
}

Outputs

Employee Updates
Compliance Events

{
  "allocated_shares": 1250.0,         # Total allocated (aggregate)
  "holdings": {                        # Multi-class mode
    "CLASS_A": {
      "shares": 750.0                 # Allocated Class A
    },
    "CLASS_B": {
      "shares": 500.0                 # Allocated Class B
    }
  }
}

Per employee:

eligibility_evaluated
compensation_capped (if over limit)
shares_allocated
annual_addition_capped (if over limit)
allocation_computed (structured event)

Compliance Events

eligibility_evaluated

Every employee gets evaluated:

{
  "year": 2025,
  "phase": "eligibility",
  "event": "eligibility_evaluated",
  "entity_type": "employee",
  "entity_id": "EMP001",
  "inputs": {
    "age": 35,
    "service_years": 5.0,
    "hours_worked": 2080,
    "eligibility_age": 21,
    "eligibility_service_years": 1.0,
    "eligibility_min_hours": 1000
  },
  "outputs": {
    "eligible": true
  }
}

compensation_capped

When compensation exceeds ERISA limit:

{
  "year": 2025,
  "phase": "allocation",
  "event": "compensation_capped",
  "entity_type": "employee",
  "entity_id": "EMP042",
  "details": {
    "original": 400000.0,
    "capped": 345000.0
  },
  "policy": "erisa_compensation_cap"
}

covered_comp_summary

Company-level summary:

{
  "year": 2025,
  "phase": "allocation",
  "event": "covered_comp_summary",
  "entity_type": "company",
  "inputs": {
    "max_compensation": 345000.0
  },
  "outputs": {
    "total_capped_compensation": 2875000.0,
    "eligible_employee_count": 45
  }
}

annual_addition_capped

When allocation value exceeds $69K:

{
  "year": 2025,
  "phase": "allocation",
  "event": "annual_addition_capped",
  "entity_type": "employee",
  "entity_id": "EMP105",
  "details": {
    "original_value": 1277500.0,
    "capped_value": 69000.0
  },
  "policy": "erisa_annual_addition_cap"
}

allocation_computed (structured)

Complete allocation audit trail:

{
  "year": 2025,
  "phase": "allocation",
  "event": "allocation_computed",
  "entity_type": "employee",
  "entity_id": "EMP001",
  "inputs": {
    "capped_compensation": 125000.0,
    "total_eligible_compensation": 2875000.0,
    "share_pool_by_security": {
      "CLASS_A": 3000.0,
      "CLASS_B": 2000.0
    },
    "price_by_security": {
      "CLASS_A": 600.0,
      "CLASS_B": 400.0
    },
    "max_annual_addition": 69000.0
  },
  "outputs": {
    "shares_allocated_by_security": {
      "CLASS_A": 130.4,
      "CLASS_B": 86.96
    }
  },
  "policy": "erisa_annual_addition_cap"
}

Edge Cases

No Eligible Employees

If no employees meet eligibility criteria:

Step 3 exits early
Share pool carries forward to next year
No allocations made

Zero Eligible Compensation

If all eligible employees have zero compensation:

Step 3 exits early
Division by zero avoided
Share pool carries forward

Annual Addition Cap Binds for Everyone

In high-share-price scenarios:

Cap may limit ALL allocations
Causes leftover shares in pool
Leftover shares carry to next year via forfeitures

Mid-Year Hires

Employees hired mid-year:

May not meet hours requirement
Excluded from allocation
Will be eligible next year if they meet criteria

Step 2: Share Pool

Provides the shares to allocate

Step 5: Vesting

Determines how much of allocation becomes vested

Plan Rules

Eligibility criteria and compliance rules

Employee Model

Employee data structure

Summary

Step 3 is the allocation engine that:

✅ Determines employee eligibility (age, service, hours)
✅ Applies ERISA compensation cap ($345K in 2025)
✅ Distributes shares pro-rata by eligible compensation
✅ Enforces annual addition cap ($69K in 2025)
✅ Supports multi-class securities with per-security tracking
✅ Emits comprehensive compliance events

Key Insight: ERISA caps can significantly constrain allocations for highly compensated employees and high-share-price companies, often causing shares to remain unallocated and carry forward to future years.

Getting Started

Configuration Guide

For Enterprise

Architecture

Data Models

Simulation Pipeline

Examples

API Reference

API Schemas

Step 3: Allocate Shares

Overview

Core Responsibilities

Eligibility Determination

Pro-Rata Allocation

ERISA Compliance

Multi-Class Distribution

Processing Phases

Phase 1: Determine Eligibility

Phase 2: Calculate Eligible Compensation

Phase 3: Allocate Shares

Phase 4: Apply Annual Addition Cap

Multi-Class Allocation

Data Flow

Inputs

Outputs

Compliance Events

Edge Cases

Step 2: Share Pool

Step 5: Vesting

Plan Rules

Employee Model

Summary

​Overview

​Core Responsibilities

Eligibility Determination

Pro-Rata Allocation

ERISA Compliance

Multi-Class Distribution

​Processing Phases

​Phase 1: Determine Eligibility

​Phase 2: Calculate Eligible Compensation

​Phase 3: Allocate Shares

​Phase 4: Apply Annual Addition Cap

​Multi-Class Allocation

​Data Flow

​Inputs

​Outputs

​Compliance Events

​Edge Cases

​Related Steps

Step 2: Share Pool

Step 5: Vesting

Plan Rules

Employee Model

​Summary

Overview

Core Responsibilities

Processing Phases

Phase 1: Determine Eligibility

Phase 2: Calculate Eligible Compensation

Phase 3: Allocate Shares

Phase 4: Apply Annual Addition Cap

Multi-Class Allocation

Data Flow

Inputs

Outputs

Compliance Events

Edge Cases

Related Steps

Summary