Employee Stock Purchase Plans

Many employees of large companies are offered the chance to participate in Employee Stock Purchase Plans (ESPPs). But what are these plans and how do they work?

These plans allow employees to contribute to a fund that will purchase company stock at a discount of up to 15% at pre-designated dates throughout the year. The share price that the discount is based on will be set by the company within the plan document but is typically the share price on the date an employee starts contributing or the lowest stock price within a set window of time. ESPPs can present employees with a great opportunity to participate in their company’s potential growth over time. But what are some things to consider?

Like other employer sponsored plans, employees must keep in mind the tax ramifications when going to sell the shares. The bargain element, which is the portion of the shares purchased at a discount, will always be taxed as ordinary income. An employee must hold the stock for at least two years after the company’s offering and at least one year after purchase to qualify for preferential capital gain treatment. Consider the strategy of a conveyer belt, where you contribute for two years and then let each of those years of contributions fund the contribution two years out.

Employees should also consider how much exposure they want within one company. It is likely that their company is already providing their salary and benefits and participating in an ESPP just increases exposure to the same company’s potential risks. Diversification is one of the keys to financial success, so employees should ensure all their eggs aren’t in one basket and they have other sources of funds.

In the order of operations of saving, ESPP should likely be further down the list, at least after maintaining an emergency fund and taking advantage of any employer matches in other retirement plans. Every individual’s financial plan and goals are different, which could change the degree or thought process in contributing to your company’s ESPP. If you would like help in determining if participating in your company’s ESPP is right for you, contact a Boulay wealth management advisor.