Employee Stock Purchase Plans (ESPPs) – Six Things to Know

Employee Stock Purchase Plans (ESPPs) – What Are they All About?

ESPPs are compensation tools to allow employees to purchase their company's stock at a discounted rate, and potentially have preferential tax treatment (every plan is a bit different).

These programs can be a great boon for employees and help them achieve their financial goals.

A couple things to consider before you start purchasing:

1) What is the company's outlook? Are they growing and healthy, continuing to deliver on growth, dividends, and a positive outlook quarter over quarter? You're already tied to them from a salary standpoint, so if something negative happens, it could affect you doubly when owning the potential stock (also known as concentration risk).

2) They are typically funded with paycheck deductions - you can defer a percentage of your pay into this just like a normal 401(k). However, these purchases are made with after-tax dollars.

• 2a) There is usually a maximum annual contribution limit of $25,000 a year in most plans.

3) Intervals. Most plans provide an offering period and a purchase date within that.

For example:

- Offering period of 3 years

- Purchase date of 6 months

In this example, it would mean that when you elect, you will be purchasing stock every 6 months for 3 years.

4) You might have a Lookback Provision. This means that you may have the option to buy the shares at the purchase date price, or the grant date price, whichever is less.

Example: If your grant date price was $50/share, and the purchase date price is $100/share, you could be able to elect the grant date price and have an immediate gain on the shares.

- 100 shares @ $50/share = $5,000 value

- 100 shares at @ $100/share = $10,000 value

You would have paid $5,000 for a cost basis on something that is today worth $10,000. Not a bad deal!

5) Your ESPP might allow you to buy at a discount! Some plans allow you to purchase at a 15% discount of fair market value, meaning that you are able to potentially capture immediate unrealized gains, and allow better positioning for the future.

If you could combine this with the lookback provision, you could realize some incredible growth, and move your family closer to their goals much quicker than before!

6) Taxes.

When you sell your shares, it's important to know how long you've owned them for from the original purchase and offer dates.

If you've owned them for more than 1 year, and it is 2 years after the original offer date, then the sale will count as a qualifying disposition (a fancy term for favorable tax treatment, aka capital gains as opposed to income).

When you go to sell, you've got to take into account both of those dates, and the potential discount of the purchase price.

It's very likely that you'll have a mixture of short term (disqualifying) and long term (qualifying) tax liabilities, so make sure you're staying organized (or working with someone who is!)

The great thing about ESPPs is that most times the documents provided will lay out all the information needed. Any time I have clients with an ESPP, we always ask for this as a reference point when we’re analyzing their finances..

If you have an ESPP, or are considering moving to a job that offers one, I’d love to help answer any questions you might have.

Here is a link to sign up for a time with me: Calendar Sign Up

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