ESPPs › Basics

An employee stock purchase plan can be a great benefit, but the rules and taxation are tricky. This two-part article presents six topics you must be familiar with to get the most from your ESPP.

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.

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.

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. myStockOptions Pro members may request permission to use it for company employees or financial-planning clients.

In general, an ESPP fits into one of three categories: tax-qualified, not tax-qualified, or direct purchase...

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...

You become an owner in your company, with all the financial upside and risks that any investment can bring. By participating in the plan...

With ESPPs, the most common criteria for eligibility is...

ESPPs offer many benefits to companies and employees. Surveys show that...

Employee stock purchase plans of this type (sometimes called "tax-qualified" ESPPs) meet the...

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...

A disqualifying disposition occurs when you sell or otherwise...

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...

Mandatory expensing started in 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...

Several surveys, including one by the National Association of Stock Plan Professionals, have found the following rates of participation among employees at the studied companies...

Because of the accounting rule, companies have taken various approaches to modifying the features of their ESPPs: reducing the discount, shortening the lookback period, or even...

Since these plans are broad-based...

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...

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

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

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

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...

Once you purchase the shares, you are a regular shareholder with voting rights and will receive any dividends that may be paid on your company stock. Your company can arrange for your shares to be held...

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

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...

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

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

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...

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

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...

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