Should You Be Participating In Your Employee Stock Purchase Plan (ESPP)?

June 27, 2019

Before answering this question, it’s important to understand what an Employee Stock Purchase Plan (ESPP) is. An ESPP is a company sponsored benefit plan that allows employees to make after-tax deferral contributions that can be used to purchase shares of the company they work for. Employees defer payroll contributions throughout an offering period, typically 6 months. At the end of the offering period, employees can buy shares at a discount from the current market value. The purchase price is based upon the lesser of the share price at the start of the offering period compared to the end of the offering period. The IRS allows eligible employees to contribute up to $25,000 per year (including discounts).

Benefits of an ESPP

If your employer offers an ESPP, this gives you a unique opportunity to build ownership in the company and potentially profit off the discounted shares you purchase. Similar to a 401k matching contribution where your employer is contributing money to your account, an ESPP is your employer giving you money in the form of a discount on purchased shares. Additionally, ESPP shares are usually not subject to vesting rules.

Example

Assume company XYZ offers eligible employees’ access to an ESPP. The company discount is 15%. Offering periods are 6 months, and the discount is based on the lower of the share price at the beginning compared to the end of the offering period. At the start of the offering period, XYZ stock was trading at $25 per share. At the end of the offering period, XYZ stock is trading at $35 per share. Based on the 15% discount, an eligible employee would purchase the shares at $21.25 – a 39.29% discount off of the current market value of $35.

Price on Start Date:______________________$25.00
Price on Purchase (End) Date:____________$35.00
Purchase Price (After 15% Discount):_____$21.25
Total Effective Discount:__________________39.29%

In this example, the eligible employee would have $13.75 per share of profit on the purchase date. Multiply this by the number of shares purchased, and the value can quickly add up.

ESPP Tax Implications

When deciding whether to participate in an ESPP, it’s important to understand several important ESPP tax rules. Employee contributions to an ESPP are not tax-deductible. Employees typically get to purchase shares at a discount, and this discount is not taxed up front. Taxes are due once the shares are sold.

Conclusion

Generally speaking, ESPPs are a great benefit for employees; however, there are a number of factors to consider, including but not limited to: discretionary cash flow, financial goals and tax implications. When appropriate, the inherent potential to purchase company shares at a significant discount can make participation in an ESPP an attractive opportunity.

Danny McAuliffe, CFP®
danny@perigonwealth.com
Danny McAuliffe is a financial planner and wealth advisor with Perigon Wealth Management.

Written by Danny McAuliffe

Head of Planning | Wealth Advisor

Latest Insights

Last Week in Review – September 16, 2022

Last week, stocks fell sharply as inflation fears intensified and short-term bond yields reached levels last seen in 2007. The S&P 500 Index recorded its most significant weekly drop since mid-June and hit its lowest point on an intraday basis since mid-July. Growth stocks fared worst, with the technology-heavy Nasdaq Composite falling nearly 5.5%. Communication services and information technology shares led the declines within the S&P 500 as Google parent Alphabet and Facebook parent Meta Platforms hit new 52-week lows. Industrials and materials shares were also fragile.

Inflation! Recession! Market Volatility! OH MY! How do we handle scary economic news?

The news – coming at us from every channel, broadcast, blog, or tweet – can sound scary and grim. Inflation, potential recession, rapidly rising interest rates, the wildly gyrating stock market … It’s enough to make us want to tune out the news completely or throw our investment statements in the shredder unopened.

Global Market Commentary August 2022

Global Equities sunk 3.68%% in August on fears of more aggressive interest rate hikes by central banks in their fight against soaring global inflation. The MSCI All-Country World Index is off 17.75% YTD, its worst eight-month start to a year since its inception. Global bonds were unable to provide reprieve, as the Bloomberg US Aggregate Bond and International Bond indexes fell 2.83% and 3.46% respectively this month and they too are off to their worst start in their index histories with YTD returns of negative 10.75% and 10.21% respectively.