ESPPs: Rules

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Articles   (Jump to FAQs)

ESPPs And Your Financial Planning (Part 1) 

Bruce Brumberg
Employee stock purchase plans (ESPPs) are popular and prevalent at most public companies. However, the structure of these plans is changing. These modifications may affect your decision to participate in your ESPP and its place in your financial planning.

ESPPs And Your Financial Planning (Part 2) 

Bruce Brumberg
Employee stock purchase plans (ESPPs) are changing in many ways, largely in response to accounting rules. For Part 2, myStockOptions.com asked financial and wealth advisors what they are recommending to clients about ESPP participation.

Fundamentals Of Employee Stock Purchase Plans (Part 2): Design Limitations And Enrollment Procedures 

Alisa Baker
Part 1 looked at the basic structural elements and terms of employee stock purchase plans (ESPPs). Part 2 considers more advanced design concepts, including tax code limits and enrollment rules.

Cut In Stock Benefits Disappoints Microsoft Staff

Ina Fried
CNET News.com, 5/25/04
With mandatory expensing, expect changes in your ESPP rules, such as in the purchase price discount and lookback feature.

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FAQs   (Jump to articles)

When did ESPP expensing become mandatory, and how may my ESPP change? 

Mandatory expensing started on January 1, 2006. Companies must recognize an earnings charge unless their ESPPs fit into the discount safe harbor rule. This has led companies to re-examine features of their ESPPs, including...

UPDATED! Do surveys show how ESPPs are changing with mandatory expensing? 

Companies are taking various approaches to modifying their ESPPs. Other than making no changes at all, they are considering (or are actually) reducing the discount, shortening the...

How much will I pay when I buy stock in the employee stock purchase plan? 

This depends on the structure of your plan and whether there is a discount and a lookback feature for the purchase price...

Will the price always be discounted from the fair market value of the stock? 

Not necessarily, as it depends on how your ESPP is structured...

Who is eligible to participate in the plan? 

In general, all employees at your company (or its designated subsidiaries or parent company) are eligible to participate. You need to be...

Is there a minimum age for participation in my company's ESPP? 

Technically, no, if you go by the wording of the tax code for qualified ESPPs under Section 423. For nonqualified ESPPs, companies can...

What is the maximum earnings amount or percentage that I can have withheld to purchase shares under the plan? What is the minimum? 

ESPP after-tax contribution limits vary by company requirements and are also subject to...

How do I join or enroll in an employee stock purchase plan? 

Procedures, rules, eligibility, and contribution amounts vary from company to company...

What is an "offering date" or "enrollment date"? 

The enrollment date is usually the first day of...

What is a "grant date" in an ESPP? 

The grant date is usually the first day of the offering period...

What is an "offering period" or "enrollment period"? 

During an offering period payroll deductions are accumulated. Shares are typically purchased under the plan at the end of the offering period...

What is the longest the offering period can be? 

The maximum ESPP "option" term (i.e., offering period) is 27 months for plans with a lookback feature but...

What is a "purchase period"? 

Some companies interchangeably use the terms "offering period" and "purchase period" when these are the same length (e.g., six months). Other companies have...

When are my shares purchased? 

Payroll contributions that accumulate during the offering period...

What is the "exercise or purchase date"? 

This is the last day of the offering (or purchase) period...

NEW! What is a "lookback"? 

A lookback is a provision in certain tax-qualified ESPPs. A lookback provision bases the purchase price not on the stock price at the time of purchase but, rather, on the...

NEW! Does participating in an ESPP affect my ability to contribute to a 401(k) plan or IRA? 

ESPPs are not tax-qualified retirement plans or profit-sharing plans, so participating in an ESPP has...

If I elect to participate in the plan, can I withdraw at any time? 

Generally, yes. Under most ESPPs, participants can withdraw from the plan at any time before the...

If I withdraw from the plan, how soon can I resume participation? 

Generally, participants who withdraw from the plan...

Can I stop deductions for a few pay periods and then start again? 

Not usually. Once you stop deductions...

Can I reduce or increase the percentage of my payroll deductions? 

Yes, usually with a deadline for when the change must be made within each purchase period or quarter. ESPPs generally permit participants to...

Can I roll unused ESPP funds into the next purchase period? 

This depends on the reason for the unused funds from your payroll deductions...

Can I begin my participation after an offering period has begun? 

It depends upon the provisions of your company's plan. With some plans that use a...

My company's 12-month offering period contains two six-month purchase periods. If I enroll after the start, at the beginning of the second purchase period, what is my lookback offering price? 

It is the price at the start of the purchase period in which you begin to participate...

For what period does my enrollment continue to be effective? 

After you submit a subscription agreement, deductions will be made continually until...

Why does my ESPP in down markets automatically opt me out and re-enroll me in a new offering period? 

Some plans are designed to start a new offering period every...

How do you calculate the $25,000 annual purchase limit? 

Internal Revenue Code Section 423(b) imposes a $25,000 annual purchase limit on ESPP participants...

How does the $25,000 calculation work when the offering period spans more than one year? 

Where an offering period spans more than one calendar year (with multiple six-month purchase periods)...

UPDATED! Will I receive any mandatory information statement from my company about exercises, purchases, and sales related to my stock options and/or employee stock purchase plan? 

Companies often give employees access to their stock option, ESPP, and restricted stock holdings and transactions with paper statements and/or through a website. Apart from the W-2 and 1099 requirements, Section 6039(a) of the Internal Revenue Code requires companies to...

Once I begin participation, how can I check the status of my account? 

You'll receive a periodic statement...

Can I contribute additional amounts if I want to buy additional shares of stock? 

Some companies may allow this, but...

Are there any restrictions on how much stock I can sell at once? 

No, unless you are deemed to be an "affiliate" of your company or...

How will my broker know which shares to sell? Should I identify them in some way? 

If you have more than one batch of company stock, you are responsible for providing your broker with enough information to identify which shares to sell. If you do not specify...

How common is it for an ESPP to have a mandatory holding period for purchased stock? 

With a mandatory holding period, the ESPP stock certificates are held by...

How does the company know I've sold my shares? 

Companies use various methods to track your stock sales. These methods include...

Can my company use the IPO price as the ESPP grant date price? 

If an IPO company wants to lock in the IPO price as the initial grant date price, it can do so for the initial offering period of up to 27 months...

Can the purchase of employee stock purchase plan (ESPP) stock be an insider-trading violation? 

Generally, there is no violation for the enrollment at the start of the offering period or for the...

Are there any securities-laws restrictions on my sale of ESPP stock? 

Federal and state securities laws may restrict...

Do blackout or lockdown periods exist for stock plans? Are there periods during which you can't exercise options or buy stock in an ESPP? 

The popular media often confuse the term "blackout" with "lockdown." For stock plans, these terms apply to different...

Can a senior executive or board member participate in an ESPP? 

Section 423 plans are limited to employees...

I am an officer in my company. Should I avoid participating in our ESPP because of Section 16 reporting and issues that stem from liability for short-swing profits? 

If your company's ESPP is qualified under Section 423 of the Internal Revenue Code, the Section 16 ramifications of participating in the plan are not as...

Can I name a beneficiary for my stock options, ESPPs, stock appreciation rights, or restricted stock? 

You should read the terms of your stock plan and grant agreement. If the plan allows...

If I die, what will happen to my ESPP participation and the holding period rules? 

If your employment ends, most Section 423 ESPPs automatically...

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