An employee stock purchase plan (ESPP) is a program offered by a company to its employees to purchase shares of company stock at a discounted price. ESPPs are a popular way for employees to build wealth over time and share in the company’s success.
There are two main types of ESPPs:
Qualified ESPPs: These plans meet certain requirements set by the Internal Revenue Service (IRS). The most important requirement is that the discount must be no greater than 15% of the fair market value of the stock on the purchase date. Qualified ESPPs offer tax advantages to employees.
Nonqualified ESPPs: These plans do not meet the IRS requirements for qualified ESPPs. Nonqualified ESPPs do not offer tax advantages to employees.
Most tech companies that offer an ESPP as an employee benefit have qualified ESPPs.
Here is how an ESPP works:
- Employees elect to participate in the ESPP by completing an enrollment form.
- Employees have a certain amount of money deducted from their paycheck each pay period and used to purchase company stock.
- The company stock is purchased at the end of each offering period, which is usually six months or one year.
- The discount is applied to the purchase price of the stock.
- Employees can sell their shares of stock at any time.
The benefits of participating in an ESPP include:
- The ability to purchase shares of company stock at a discounted price.
- The ability to purchase shares of stock on a regular basis, which can help to dollar-cost average the investment.
- The ability to sell the shares of stock at any time, which gives employees flexibility.
The risks of participating in an ESPP include:
- The stock price could decline after the purchase date.
- The company could go bankrupt.
If you are considering participating in an ESPP, it is important to weigh the benefits and risks carefully. You should also consider your financial situation and investment goals.
In general, if you quickly sell shares after purchase, ESPPs are a fairly low risk way to increase your income.
Here are some additional things to keep in mind about ESPPs:
- The minimum amount that you can contribute to an ESPP is usually $25 per pay period.
- The maximum amount that you can contribute to an ESPP is usually 10% of your salary.
- You can sell your shares of stock at any time, but you may have to pay capital gains taxes on any profits.
Tech Company ESPPs
Apple’s ESPP:
Apple offers a 6-month lookback ESPP to its employees. This means that employees can purchase shares of company stock at a discount of 15% off the lower of the two prices: the fair market value on the first day of the offering period or the fair market value on the last day of the offering period.
An employee’s payroll deductions under the Purchase Plan are limited to 10% of the employee’s eligible compensation and employees may not purchase more than $25,000 of stock during any calendar year.
Microsoft’s ESPP:
Microsoft has an ESPP for all eligible employees. Shares of common stock may be purchased by employees at three- month intervals at 90% of the fair market value on the last trading day of each three-month period. Employees may purchase shares having a value not exceeding 15% of their gross compensation during an offering period.
IBM’s ESPP:
IBM has an ESPP for all eligible employees. Shares of common stock may be purchased by employees at 85% of the fair market value. Employees may purchase shares having a value not exceeding 10% of their base salary during an offering period. Employees may not purchase more than $25,000 of stock during any calendar year.
What About Amazon?
Amazon offers a Direct Stock Purchase Plan (DSPP) to its employees. Employees can purchase shares of company stock via payroll deduction and without paying a brokerage commission (although there may be fees to sell shares). But there is no discount.
These are just a few examples of large U.S. tech companies that offer ESPPs. The specific terms and conditions of each ESPP will vary, so it is important to read the plan carefully before participating.
Important ESPP Considerations
Employees at tech companies should be aware of several key points regarding Employee Stock Purchase Programs (ESPPs) to make informed decisions about participating in these programs:
How ESPPs Work:
Understand the basic mechanics of an ESPP. ESPPs allow employees to purchase company stock at a discounted price, typically through payroll deductions.
Eligibility and Enrollment:
Know the eligibility criteria, enrollment periods, and any waiting periods before participating in the ESPP.
Discount Rate:
Be aware of the discount rate offered. ESPPs often provide a discount on the market price of company stock, which can range from 5% to 15% or more.
Contribution Limits:
Understand any contribution limits, as there may be a maximum percentage of your salary that you can contribute to the ESPP.
Holding Periods:
Determine if there are any required holding periods. Some ESPPs may require employees to hold the purchased shares for a certain period before selling them. (Not common)
Tax Implications:
Know the tax implications of participating in an ESPP. The discount on stock price may be considered taxable income, and the sale of ESPP shares may have capital gains tax implications.
Risk and Diversification:
Consider the risks associated with holding a significant portion of your investments in your employer’s stock. Especially if you already own significant RSUs. Diversifying your investment portfolio is crucial for risk management.
Vesting:
Check if the ESPP has a vesting period. Vesting means that you must work for the company for a specified period before gaining ownership of the purchased shares. (Not common)
Enrollment Period Decisions:
Make informed decisions during enrollment periods. Decide how much to contribute and whether to participate in the ESPP based on your financial goals and circumstances.
Market Volatility:
Recognize that the stock market can be volatile. The value of your ESPP holdings can fluctuate, so be prepared for potential market swings.
Company ESPP Policies:
Familiarize yourself with your company’s specific ESPP policies, including any unique features or restrictions.
Regular Monitoring:
Continuously monitor your ESPP account and stay updated on changes in the stock market and company performance that may affect your investment.
Overall, employees should view ESPPs as part of their total compensation package and make decisions that align with their financial goals and risk tolerance. Balancing participation in an ESPP with a diversified investment portfolio can be a prudent approach to building long-term financial security.
