Employee Stock Purchase Plan | ESPP

Employee Stock Purchase Plans (ESPP) are company administered benefit programs that offer employees the opportunity to purchase common stock in their company, typically at a discount.

Advantages of an ESPP

  • Discount offers an incentive to save/invest
  • Convenient contributions through payroll deduction
  • No commitment to purchase a specific number of shares
  • The discounted purchase price of stock (if your plan offers)
  • Low purchase/Sell transaction costs

How to Participate in ESPP

If your employer offers an ESPP, then you will have the opportunity to contribute through payroll deductions during a defined offering period. Your employer must follow IRS guidelines to determine the length of the offering period, the amount that you can contribute and the purchase dates.  On the purchase dates, your accumulated contributions can be used to purchase shares of stock, which is typically at a discounted price of the fair market value (FMV) that day. The formula for any applicable purchase discount is also determined by your employer, within IRS guidelines.

  • Risk Tolerance – Common stock carries a higher risk/reward correlation
  • Allocation of your investments – A high concentration of any one stock can mean higher risk
  • Tax Considerations – Understanding the tax implications of ESPP shares can help you make buy/sell decisions effectively and keep more money in your pocket.

Arizona’s Largest ESPP’s | Intel, Honeywell

I advise many clients who participate in several of Arizona’s largest ESPP plans, including those of Intel and Honeywell.  My familiarity with these plans allows me to help my clients learn from other peoples mistakes.

Immediate Returns | ESPP Advantage

As long as your liquidity, cash flow and risk tolerance allow for the contributions, I am typically a fan of ESPP’s. Even if you do not want to hold the stock for long, you can typically buy them at a discount and sell them at fair market value. For example, if your company allows you to purchase shares of your company at 85% of the fair market value on the purchase dates, then you can sell the shares right away and potentially realize a 15% gross profit. This discount is typically grossed into your paycheck and taxed as ordinary income. Employees can generally sell shares purchased through the employee stock purchase plan at any time. However, if the shares were purchased under a Section 423 plan, the tax consequences will be different depending on how long you have held the shares. To get a favorable tax treatment, you have to hold the shares purchased under a Section 423 plan at least one year after the purchase date, and two years after the grant date.

Tax Advantages of ESPP

Tax planning is my specialty. Understanding your plan’s holding requirements can make a big difference in how much tax you ultimately pay. You will hear terms like qualified and non-qualified dispositions. This pertains to whether or not you have met the holding requirement of your ESPP. This also determines whether your profits are subject to ordinary versus long-term capital gain tax rates. With qualified Section 423 employee stock purchase plans, you are not taxed at the time the shares are purchased, only when you sell. Depending on whether the shares were held for the required holding period, a portion of your gain may be taxed as capital gains or as ordinary income. For nonqualified employee stock purchase plans, the difference between the fair market value of the stock and the amount you paid is treated and taxed like the spread in a non-qualified stock option as ordinary income and tax is owed on the purchase.

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. Investing in securities is subject to risk including risk of loss of principal. No strategy assures success or guarantees against loss.

Kevin Foster, CFP ®
Comprehensive Wealth Manager | Tax Advisor
Chandler, AZ 85226