What is an employee stock purchase plan? What are the key facts to know?
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. This differs from a 401(k) plan, to which money is contributed before income tax withholding.
Five key facts to know about ESPPs:
- Employee stock purchase plans can have different contribution rules and features, including discounts or company contributions (see a related FAQ).
- ESPPs have a set offering period when these compensation deductions occur, with set purchase dates that use the accumulated deductions.
- The most common type of ESPP is known as a Section 423 plan, named after the part of the tax code that governs it.
- An ESPP that is tax-qualified under Section 423 ESPP offers favorable taxation of the purchase discount. Consequently, this type of ESPP is called a "qualified" ESPP (not to be confused with "qualified" retirement plans).
- Other types of ESPPs are either nonqualified plans or direct purchase plans.
See a related article on all of the key dates and terms you must know before you participate in an ESPP.