Who is eligible to participate in an ESPP? Can anybody, such as part-time workers or employees outside the US, be excluded from participation?
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. With ESPPs that are not this type, companies have more flexibility in determining who is eligible and who can be excluded.
To be eligible for a Section 423 ESPP, you must be an employee from the start of the offering until at least three months before the purchase date (12 months for termination because of disability). However, most companies end participation when you terminate employment. Independent consultants, contractors, and nonemployee directors are not eligible. The tax code also does not permit grants to anyone who, after the ESPP purchase, would own more than 5% of the voting power or the value of the company's stock.
In ESPPs that are Section 423 plans, companies may exclude from eligibility some workers if they meet any of the following conditions:
- They have been employed for less than two years.
- They are highly compensated, as defined by Section 414(q) of the tax code. Set by the IRS, the related threshold of yearly compensation is $150,000 in 2023.
- Their customary employment is part-time or seasonal (e.g. 20 hours or fewer a week and/or fewer than five months in a calendar year).
Alert: For eligibility questions, always check your plan documents and company communications materials. If you are uncertain, speak with the staff members at your company who handle the ESPP.
Subsidiaries And Global Employee Stock Purchase Plans
A parent company is required to extend participation to wholly owned subsidiaries. If the company makes an offering to the employees of a subsidiary corporation, all employees of that subsidiary must participate on the same terms and conditions. Therefore, the company may choose not to offer a standard Section 423 ESPP to employees of foreign affiliates that are treated as separate corporations under US tax law. Instead, the company may either exclude employees in certain countries; comply (often at great cost) with the local tax, securities, and employment laws; or adopt a different type of ESPP in those countries with special features that are unique to the country. (See the Abbott Laboratories 2009 ESPP for non-US employees in Appendix C of its 2009 proxy.)
The issues that arise when a US company extends ESPP participation to employees outside the US, particularly to non-US citizens, remains a topic of attention for global stock plans. In 2009, the IRS issued final ESPP regulations that somewhat clarify whether companies, particularly those with employees outside the US, can limit participation or deny some employees the same "rights and privileges" extended to others, without disqualifying the ESPP. For example, when offering ESPPs to non-US employees, companies can have separate ESPP offerings for different corporate entities that give less favorable terms or provide different participation rules. Similarly, companies can retain qualified ESPP status even if local laws require features that would otherwise violate the rules of Section 423. However, companies cannot exclude foreign employees merely because of costly or complex local compliance. They can do so only if the offering would be illegal in that country.
See a related FAQ with survey data on the most common eligibility requirements for ESPP participation at US companies.