Employee Stock Purchase Plans: myStockOptions.com Newsletter No. 39, September 2009
|IN THIS ISSUE|
ESPP tax oddities when stock price quickly rises after big drop
Job loss: what happens to your ESPP contributions?
Articles and podcast on ESPP basics and financial planning
ESPPs remain popular, according to new study
Self-study courses add more continuing education credits for CFPs and CEPs
SPONSORS OF THIS ISSUE
|EDITOR'S WELCOME; UPCOMING CONFERENCES|
Whether you are new to employee stock purchase plans (ESPPs) or have a lot of experience with them, you can find the right level of education and guidance on myStockOptions.com in our highly popular articles, FAQs, podcast, and self-study course on ESPPs. While myStockOptions.com has become our trusted brand name, we could just as well be called myESPP.com (in fact, we own the URL!). Below are parts of a few FAQs about ESPPs to introduce our content on the topic.
For those of you attending the annual conference of the National Association of Stock Plan Professionals in San Francisco (November 9–12, 2009), please visit me at our booth in the exhibit hall. Our educational resources are particularly useful when employees and executives are new to ESPPs, when an enrollment or purchase date is about to occur, and during the upcoming tax season.
In addition to giving a talk at the NASPP conference during the Restricted Stock Essentials program, I will be speaking to the Houston chapter of the Financial Planning Association (FPA) on November 2, 2009.
~ Bruce Brumberg, Editor-in-Chief, and the staff of myStockOptions.com
|SPECIAL FAQs ON ESPPs|
Below are two frequently asked questions (FAQs) about employee stock purchase plans (ESPPs). They are taken from the 700+ FAQs on myStockOptions.com, including those in our highly popular Tax Center. All of these FAQs are available for your company to license or by Premium or Pro Membership. Please do not copy or excerpt this information without our permission.
How is my ESPP stock sale taxed when the stock price quickly rises after a big drop or keeps falling?
ESPP taxation can be confusing to begin with, and even more so in a down market and, afterwards, when stock prices quickly rise. When you satisfy the holding-period requirements for tax-qualified ESPPs, you still have ordinary income for the portion of the gain equal to your company's discount (e.g., 5%, 10%, or 15%) from the offering/start price, regardless of the actual purchase price for the stock, and even if there is no lookback.
Ordinary income is this amount or the actual gain at sale, whichever is lower. When stock is sold at a loss, you have no ordinary income, just a capital loss.
However, when you sell the stock early in a disqualifying disposition (sale within one year from acquisition), only the spread at exercise is ordinary income. With this early sale, you will have this ordinary income, even though you have no actual gain because the stock price dropped after purchase.
With a tax-qualified ESPP, the breakdown of ordinary income and capital gains depends on when you sell the stock and its price. This can create tax oddities. It is usually better to have capital gains than ordinary income, as capital gains can be netted against capital losses.
Example: The start-date price is $20. The stock price drops so that the purchase-date price is $10. The 15% discount results in an $8.50 purchase price.
Example with sale when stock price jumps to $15. Hold long enough: have $3 in ordinary income (15% of $20 start price) and $3.50 in capital gain ($15 sale price minus ESPP stock that has $11.50 tax basis). Sell sooner: have $1.50 in ordinary income ($10 market price at purchase minus $8.50 purchase price) and $5 in capital gain ($15 sale price minus ESPP stock with $10 tax basis). In this situation, where the stock price quickly rose after the purchase date, the early sale results in more capital gain income than the sale after one year did.
Example with sale when stock price drops to $5. If you wait to sell the stock until one year after it drops to $5, you will have a $3.50 short-term capital loss and no ordinary income (when the loss is greater than ordinary income, it is all capital loss). If you sell before one year elapses, you will have $1.50 in ordinary income and a $5 short-term capital loss.
You will continue to own stock purchased for you during your employment, but your eligibility for participation in the plan ends. Any funds withheld from your salary but not used to purchase shares before the end of your employment will be returned to you, normally without interest, within a reasonable period.
For plans that are tax-qualified under the rules of IRC Section 423, the tax code permits your company to keep the pre-termination payroll deductions to purchase shares when the purchase period ends no more than three months after your termination date (12 months for disability). However, most plans do not permit this, because the ESPP is intended to be a benefit for current employees.
This means that if you terminate your employment before the purchase date, under most plans shares are not purchased for you on a pro rata basis. This applies even if employment ends for reasons other than job loss, such as death, disability, or retirement.
Example: Before you left your company, salary deductions occurred for two months, with a six-month ESPP offering period. The money that you paid is not saved for purchase to the six-month point.
For additional FAQs and articles on what happens to all types of stock grants, including stock options and restricted stock, when you lose your job, see the section Job Events: Termination.
With insider trading cases in the news, now is a good time for insider trading education and focusing on your compliance program. The dramatic Think Twice video series will teach, entertain, and jolt your employees and executives about insider trading and securities fraud. Used by over 1,000 companies and developed with input from the SEC Enforcement Division, these powerful videos with memorable story-lines will drive home key points on
For more information on the Think Twice video series, and a free white paper on insider trading prevention and education, see http://www.insidertradingvideos.com. Both VHS and DVD formats are available. Qualified corporate buyers, including new IPO companies, can request free previews. Intranet licensing is available.
Fundamentals Of Employee Stock Purchase Plans, by 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 four-part series covers all aspects of ESPPs, from the basic to the complex. Part 1 is free to all registered users of the site.
Are You Taking Full Advantage Of Your Company's Employee Stock Purchase Plan?, by Sandra Sussman
Strangely, many employees don't take advantage of their companies' employee stock purchase plans. This article will show you exactly why ESPPs are a good deal.
Employee Stock Purchase Plans & Your Financial Planning, by Bruce Brumberg
ESPPs are popular and prevalent at most public companies. However, the structure of these plans is changing. As this two-part article series shows, these modifications may affect your decision to participate in your ESPP and its place in your financial planning.
ESPP Choices: Flip Or Hold?, by Timothy Farmer and Gregory Geisler
After you decide to participate in your company's ESPP, you must choose whether to sell the stock soon after purchase or to hold it (and for how long). This two-part article series examines different ways to participate in your ESPP according to relative risk tolerance, timeframe, and needs for money.
Avoid Tax Return Mistakes With Stock Options & ESPPs: What You Need To Know In 2009, by Lynnette Khalfani with Bruce Brumberg
Tax season will be here before you know it. Read this article if you are puzzled by Form 1099-B or don't know how to report sales of ESPP stock on Schedule D of IRS Form 1040.
Advanced Course On Employee Stock Purchase Plans For CEP & CFP Continuing Education Credit
Certified Equity Professionals and Certified Financial Planners can earn five hours of continuing education credit from this online course of study and exam.
In addition to the articles above, you can stream or download our 10-minute podcast on ESPPs. This lively interview explains how ESPPs work and outlines the basic tax issues. Available free!
Content with the symbol requires Premium Membership.
About E*TRADE Corporate Services
|STUDY SHOWS VITAL ROLE FOR ESPPs|
The National Center for Employee Ownership (NCEO) and the Certified Equity Professional Institute (CEPI) recently performed joint research on ESPPs. Their survey, conducted in June and July 2009, includes responses from over 400 companies. Most of the companies viewed the ESPP as a "beneficial" or "excellent" investment for the company. The data provide insight into trends in plan design, participation rates, contribution percentages, W-2 tax reporting, overall satisfaction with the plan, and many other topics.
Some of the many findings include:
- A meaningful percentage of hourly and salaried employees, managers, and executives participate in their ESPPs. For example, at 30% of the companies the participation percentage among salaried employees was between 30% and 70%. The same pattern was observed among managers at 32% of the companies. At 29% of the companies, the participation rate among executives was between 70% and 100%.
- 78% of companies with Section 423 plans have a discount of 11%–15% off the stock price.
- Companies with larger discounts (11%–15%) were 2.5 times more likely to experience increased participation than those with smaller discounts.
- 55% of companies with Section 423 plans have other limits on purchases in addition to the statutory limit of $25,000 per calendar year.
- Approximately 53% of the companies with 423 plans had a six-month offering period, and 64% used a lookback to determine the purchase price.
To order the ESPP survey report and obtain access to the data, go to the NCEO website at http://www.nceo.org/main/misc.php/id/152/.
Tackling Your 2010 Compensation Disclosures: The 4th Annual Proxy Disclosure Conference & 6th Annual Executive Compensation Conference
Executive compensation is in the cross-hairs like never before. With Congress, the SEC staff, investors, and the media scrutinizing all executive compensation practices and disclosures, it is critical to have the best possible guidance. This pair of full-day conferences with an information-filled agenda will provide the latest essential—and practical—implementation guidance that you need.
More important than ever. With the coming reforms—particularly say-on-pay—all eyes will be focused on executive compensation practices (and the resulting disclosures), and you will need to be on top of the latest guidance in this year of incredible change. As a result, these conferences—with the most respected experts in the field—will be a must for anyone who has any role in setting/approving compensation or the preparation or review of proxy statements.
Who should attend: Every person responsible for preparing and reviewing compensation disclosures, and every person responsible for implementing executive and equity compensation plans or who counsels or advises boards, including CEOs, CFOs, directors, HR staff, lawyers, corporate secretaries, accountants, and consultants.
Two Critical Conferences For One Price!
|EXPANDED CONTINUING EDUCATION FOR CEP AND CFP PROFESSIONALS: MORE SELF-STUDY COURSES WITH CE CREDIT|
Our growing resource of online courses and exams now offers a total of:
- 18 hours of continuing education credit for Certified Financial Planners (CFPs)
- 15 hours of continuing education credit for Certified Equity Professionals (CEPs)
These credits are available from the following courses of study, each followed by its own exam:
- Financial Planning For Clients With Equity Compensation (3 CFP credits)
- Advanced Course on Restricted Stock, RSUs, & Performance Shares (5 credits for CEPs and CFPs)
- Advanced Course on Employee Stock Purchase Plans (5 credits for CEPs and CFPs)
- Advanced Course on Nonqualified Stock Options (5 credits for CEPs and CFPs)
This benefit is available only to Premium and Pro Members of myStockOptions.com. To earn the available credits offered by each program, you must score 70% or better on the exam. Think you can ace the test? Visit the Learning Center to get started on a course of study. Then take an exam and show your stuff.
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