ESPPs: Basics

Fundamentals Of Employee Stock Purchase Plans (Part 1): Basic Structure And Terms

Alisa Baker
Your company's employee stock purchase plan (ESPP) may be one of the best employee benefits in your total compensation package. However, to maximize the value of your ESPP, you need to understand how it works. This starts with knowing its basic structure and key terms, and how ESPPs work in both up and down markets.

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.

Are You Taking Full Advantage Of Your Company's Employee Stock Purchase Plan?

Sandra Sussman
Many employees don't take advantage of their companies' employee stock purchase plans (ESPPs). I want to give you a better appreciation of why ESPPs are a good deal.

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What is an employee stock purchase plan?

An employee stock purchase plan (ESPP) is a type of stock plan that permits employees to use after-tax payroll deductions to acquire shares of their company's stock. Plans can have...

How does an ESPP differ from a stock option plan?

Employee stock purchase plans tend to be viewed as a benefit while stock options are a form of compensation. From an employee perspective, there are some differences in operations, eligibility, and design...

Are there different kinds of employee stock purchase plans?

Yes. The most popular type of ESPP is known as a Section 423 plan, after the federal tax-code section that sets the requirements for this type of plan. Through an ESPP that qualifies under Internal Revenue Code Section 423, an employee subject to US tax law can...

How does a Section 423 ESPP work?

Employee stock purchase plans of this type are "qualified" under Section 423 of the Internal Revenue Code. When you enroll in the plan...

Why is a Section 423 ESPP a good deal?

What makes this employee benefit a super deal is that you can purchase company stock at a discount of up to 15%...

How does an ESPP work if it is not a qualified plan under Internal Revenue Code Section 423?

If it is structured like a qualified Section 423 plan (except for whatever feature disqualifies it), it will work in the same way but without...

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...

Do surveys show how employee stock purchase plans 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...

Why do companies offer employee stock purchase plans?

Companies offer their employees the opportunity to...

How can I find out whether my company has an employee stock purchase plan, what type it is, and what its basic features are?

Since these plans are broad-based...

UPDATED! What documents should I read before deciding to participate in my company's ESPP? What is my company required to show me?

Along with giving you the required prospectus, your company can probably provide brochures and enrollment materials about the plan and how it works. You want to carefully review the...

What is the eligible compensation that can be used for calculating the money that is available for the stock purchase?

The IRS lets companies define this as long as...

How is the fair market value of company common stock determined for calculating the discounted purchase price?

"Fair market value" is determined in a number of ways that vary...

Under the plan, do I pay commissions on the purchase of stock or on the sale of that stock?

Because companies usually pay all costs associated with administering plans...

What happens to my payroll deductions? What happens if more money has accumulated in my ESPP account than can be used to buy shares?

The deduction amount that you have authorized is withheld from each paycheck and is credited to a non-interest-bearing book entry in your company's accounts. In the short term...

What happens to the purchased shares, and when will I receive my stock certificates?

Once you purchase the shares, you are a regular shareholder with voting rights and receive any dividends. Your company may arrange for your shares to be held in book-entry form in an account in your name...

When can I sell my ESPP shares?

In general, you may sell your shares at...

How do I sell shares that I acquire through a stock option exercise, restricted stock vesting, or ESPP?

Whether you hold stock certificates, hold your shares in a brokerage account, or have an online trading account, you will need the assistance of a stockbroker...

Why does my employer require me to give notice of a sale of ISO or ESPP stock?

If you make a disqualifying disposition with your ISO or ESPP shares...

If I leave the company, what happens to the money that has been deducted from my paycheck to purchase ESPP shares?

You will continue to own stock purchased during your employment, but your eligibility for participation in the plan ends. Any funds withheld from your salary will be...

How will a stock split affect my ESPP and the shares I purchased just before the split?

You want to review your ESPP documents for a provision that...

How does the split affect brokerage accounts of ESPP participants?

Since, with a brokerage account, your shares are held in "street name" your account will be credited with the split shares on the payable date...

How does the split affect the ESPP enrollment price that will be established just prior to the split?

Most ESPPs have a provision that makes an adjustment...

What happens to my ESPP when my company is acquired?

Your contribution does not roll over into the buyer's ESPP, and rarely is the target's offering period continued after the deal is closed...

In an acquisition, what happens to money that has been waiting to purchase shares in my ESPP?

Check your company's plan for any specific provisions, including its flexibility to amend...

UPDATED! How many employees generally participate in ESPPs?

In its 2006 survey of stock plans in many countries, the National Association of Stock Plan Professionals found the following average participation rates...

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