Offered by most publicly traded companies, an ESPP is an employee benefit that allows you to purchase shares of your company stock at a discount. It’s this discount that’s the most significant advantage of Employee Stock Purchase Plans. For most employers, you can expect that discount to range between 5%-15%—obviously the higher the better for you! These shares can then be sold immediately (known as a “Quick Sale”) locking in a tidy and risk-free profit.
What Is an Employee Stock Purchase Plan?
ESPPs are used to incentivize and reward employees by giving them the opportunity to profit from a percentage of the value of their own stock. The ESPP is typically offered in multiple units per year as a percentage of your employee’s salary and is funded in monthly installments over a three to a five-year term. ESPPs allow your employees to sell stock in their employer as often as they want for a fixed discount, no questions asked. An ESPP makes it easy for employees to capitalize on the investment potential of their stocks as long as they stay within their selling price and tax guidelines. The employee can, for example, sell a share of stock whenever they want to take that Christmas bonus check or perhaps to add some extra cash to their retirement fund.
Qualified vs. Nonqualified Plans
There are two common types of employee stock purchase plans, qualified and nonqualified. Qualified plans are reserved for both salaried employees and hourly workers. Qualified plans come with all of the following benefits: First is Lower fees. A qualified plan is less expensive than the nonsalaried equivalent and requires minimal paperwork. The second one is Deferred compensation. A qualified plan offers the opportunity to defer your retirement savings for as long as you work with your employer. This can mean huge savings over the course of your career. The next one is Lifetime savings. Qualified plans allow you to leave your retirement savings behind with your employer, giving you the chance to earn your retirement dollars immediately.
Key Dates and Terms
There are a few important key dates to keep in mind when preparing to implement an ESPP: Effective Date: You must request the waiver of the “No Take Back” period (typically 30 days), which means the company will not buy back the shares of stock before the plan is implemented. Approval Date: The approval date is when the company must approve the plan, and whether it is approved is based on the company’s current status with the SEC and applicable laws. The approval date is when the company must approve the plan, and whether it is approved is based on the company’s current status with the SEC and applicable laws.
Enrollment Process and Plan Mechanics
The ESPP enrolment process consists of completing a company enrollment form, paying the enrollment fee, and then arranging a “quick sale” sale. Note that the quick sale process and the enrollment process are separate. Once you choose to participate in the ESPP, you’ll have to go through a few further steps before you can close your transaction.
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This strategy is a great one for high-earning employees as you can calculate your maximum potential profit by multiplying the average cost per share plus 15% by your employee’s salary. So if you’re paying $500 per share on each employee’s salary of $35,000 a year, you can calculate that your maximum potential profit would be $36,000 in profit per year (25% per year x $500 per share + 15% x $35,000 = $36,000). Now, it’s important to understand that this is theoretical, as for an employee to buy into this strategy, they’ll need to be eligible to participate, and have an ESPP to start with.
ESPs are available for any employee in any position within your company who is paid a salary, is non-contracted, is eligible for benefits, and is able to receive shares of stock. There are three main types of stock that you can purchase in your company: Ordinary shares of stock are stock options that are granted by the company. These are available for anyone who does not have tenure at the company or is hired in the future. Upon purchase of the shares, your employee receives an ESPP application, which you will have to sign in order for the shares to be released. You can then give these shares to your employee, or sell them.
ESPPs offer you the opportunity to move your taxable income away from your wages and towards your profits—that’s an important benefit that any retiree or investor should consider. This benefit can help you to achieve a lower tax bracket while receiving the financial benefit of your company stock purchase plan. Many ESPPs have the ability to elect a “gain mitigation” benefit which can be significant in helping you to avoid paying large capital gains taxes on your gains.
Other Advantages of ESPPs
ESPPs are a practical solution for getting employee ownership off the ground, but they are not the only path to increased employee ownership. Many employers offer ESPPs as a supplement to pension, 401K, or other payroll plans. For example, one may offer ESPPs as a benefit to cover the incremental cost associated with payroll taxes as employees transition from a traditional pension or 401K program to an ESPP-type program. ESPPs may also be offered by employers as a retention tool to keep long-term employees onboard. Furthermore, employees may decide to participate in a stock plan as a personal investment in their future.
How Do Employee Stock Purchase Plans Work?
Employee Stock Purchase Plans (ESPP) allow you to purchase company stock at a discount (5% or less). Do so while minimizing the potential impact on your existing investment strategy. Leverage your employee stock purchase plan contributions as needed for your portfolio management goals. With all this, an ESPP is a very effective strategy to help you build a personal investment portfolio.
These are great ways to increase profits and build wealth. This article provides a basic introduction to the world of ESPPs and explains the details of each type so that you’re ready to explore the marketplace for yourself. This can also be a great opportunity for you to use up any existing employees’ shares that you haven’t sold! Remember—contributing to ESPPs can help you and your employees build wealth and diversify your investments, while simultaneously providing your company a cost-effective way to support your business.
“If you have any feedback about what are employee stock purchase plans that you have tried out or any questions about the ones that I have recommended, please leave your comments below!”
NB: The purpose of this website is to provide a general understanding of personal finance, basic financial concepts, and information. It’s not intended to advise on tax, insurance, investment, or any product and service. Since each of us has our own unique situation, you should have all the appropriate information to understand and make the right decision to fit with your needs and your financial goals. I hope that you will succeed in building your financial future.