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ESPPs: Rules


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Articles (Jump to FAQs)

Key Dates And Terms You Must Know For Your Company's ESPP This is premium content

Matt Simon
Your employee stock purchase plan (ESPP) may be one of the best benefits your company offers. However, to maximize its value, you must know its key dates and terms. This article explains the basics you need to know for your ESPP participation.

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

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.

Employee Stock Purchase Plans & Your Financial Planning (Part 1) This is premium content

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.

Employee Stock Purchase Plans: Qualified And Nonqualified Plans This is premium content

Bruce Brumberg
myStockOptions.com
PowerPoint presentation (in PDF) that Bruce Brumberg, editor-in-chief of myStockOptions.com, developed for talks and meetings on the basics of employee stock purchase plans. Covered topics include types of ESPP, the ESPP tax treatment, and survey data on the use of ESPPs by companies. (Premium members may request permission to use it at their companies.)

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FAQs (Jump to articles)

What are the top 10 questions I should ask about my company's employee stock purchase plan?

Employee stock purchase plans (ESPPs) can be designed in different ways and provided with various features that make them appealing to participants. Before you enroll in your company's ESPP, however, you should be sure to know the answers to the following questions...

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? What do surveys show about corporate practices? This is premium content

The price will not necessarily be discounted, as this depends on the structure of your ESPP. The tax rules require only that...

Can my ESPP go underwater or be affected in other ways by a down market? This is premium content

Employee stock purchase plans cannot be "underwater" in the traditional sense of having a purchase price greater than the current stock price. Down markets can create special opportunities and unique issues for ESPPs. For example, with an ESPP...

Who is eligible to participate in an ESPP? Can anybody, such as part-time workers or employees outside the US, be excluded from participation? This is premium content

In general, all employees at your company (or its designated subsidiaries or parent company) are eligible to participate in a tax-qualified Section 423 ESPP as long as certain conditions are met. You need to be...

Is there a minimum age for participation in my company's ESPP? This is premium content

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? This is premium content

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. Generally, however, you enroll in an ESPP by...

How long will my enrollment continue to be effective? This is premium content

You want to check your plan documents, such as your enrollment form, to find out. If the period of enrollment is unclear...

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

This is an important date to participants in an ESPP. 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. This is an important date because...

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...

What is the exercise or purchase date?

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

When are my shares purchased?

Payroll contributions that accumulate during the offering period...

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...

What is a "reset" provision in an ESPP, and how does it work? This is premium content

A reset provision occurs in a Section 423 tax-qualified employee stock purchase plan when a long offering period has a series of short purchase periods and a lookback provision determines the discounted purchase price. Reset provisions are more commonly found in...

If I elect to participate in the plan, can I withdraw at any time? This is premium content

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? This is premium content

Generally, participants who withdraw from the plan...

Under my ESPP, can I assign or transfer my rights to another person? This is premium content

As should be indicated on your enrollment form...

Can I stop deductions for a few pay periods and then start again? This is premium content

Not usually, under the traditional employee stock purchase plan. Once you stop deductions you cannot start them again in the same ESPP offering period. However, companies...

Can I reduce or increase the percentage of my payroll deductions? This is premium content

Yes, usually with a deadline by which the change must be made to apply during an offering or purchase period. ESPPs generally permit participants to...

Can I roll unused ESPP funds into the next offering? This is premium content

This ability to carry over remaining contributions in an employee stock purchase plan depends on the reason for the unused funds from your payroll deductions. Situations can also occur in which the leftover contribution amount is...

Can I begin my participation after an offering period has begun? This is premium content

It depends on the provisions of your company's plan and the length of the offering period. With some ESPPs you must complete a subscription agreement authorizing payroll deductions by...

How do you calculate the $25,000 annual purchase limit and the maximum number of shares you can buy? This is premium content

Internal Revenue Code Section 423 imposes a $25,000 annual purchase limit on ESPP participants (your company can impose a lower limit on the dollar amount you can contribute to buy shares). What this means is that you may not...

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

When an offering period spans more than one calendar year (with multiple six-month purchase periods), whatever you do not use up in year one will be...

Once I begin participation, how can I check the status of my account? This is premium content

This depends on the system or firm your company uses for administration. Either you will receive a periodic statement of your account in print or you will get access to it online. It will show...

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? This is premium content

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

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