Employee Stock Purchase Plans: myStockOptions.com Newsletter No. 77 (Sept. 2019)
What are the benefits of participating in an ESPP?
Top 10 rules for ESPP financial planning
Articles, videos, podcast, and other resources on ESPPs
Deloitte survey data on ESPPs
New IRS Private Letter Ruling on ESPPs allows loans
Tax alert: IRS restores capital gains total to Form 1040
Visit our booth at NASPP 2019
ESPP course among Learning Center offerings for CEP and CFP continuing education credits
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This issue of our quarterly newsletter showcases some of our award-winning content on employee stock purchase plans (ESPPs). Below you will find information about FAQs, articles, podcasts, and videos that give a taste of our expertise on this and every other topic in stock compensation. For much more, see our ESPP section and the ESPP portions of the Tax Center. Thanks for reading!
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This summer marked 19 years since we launched myStockOptions.com. Thank you for using our website and for your support and feedback over the years. We continue to enjoy helping stock plan participants, ESPP participants, and their companies get more value from equity plans.
—Bruce Brumberg (Editor-in-Chief)
|What are the benefits of participating in an employee stock purchase plan?|
An employee stock purchase plan (ESPP) offers many benefits.
You Acquire Ownership In Your Company
By participating in an ESPP, you become an owner in your company, with all the financial upside and risks that any investment can bring. An article in San Antonio Express-News explains some of the benefits that ESPPs present for you and your company. As one store manager explains, an ESPP makes employees "enthusiastic" because they "feel like it's their company." As employers eliminate company stock as a 401(k) investment choice, they are are making ESPPs more attractive as an alternative way to acquire company shares.
Special Purchase OpportunityDepending on the type of ESPP and its features, you may be able to purchase stock in the company at a discount from its fair market value. Alternatively, some companies have an open-market purchase plan, which offers no discount on the price but allows employees to purchase shares periodically without the usual brokerage fee.
A survey of ESPP participants by Fidelity Investments found that ESPPs can help to improve employees' financial well-being. A separate Fidelity survey shows how ESPP participants used funds from ESPP stock sales to improve financial wellness.
Schwab Stock Plan Services conducted a national survey of 1,000 stock plan participants. The survey found that 76% of the participants consider equity compensation, including ESPPs, to be part of their long-term financial plans, making them feel less financially stressed. The survey also found that it makes 63% feel more prepared for retirement.
An ESPP also lets you take advantage of something called dollar-cost averaging. In this concept, you invest the same amount of money to buy stock regularly through payroll deductions, regardless of the stock price, so you end up buying more shares when the price is down and fewer when the price is up. While dollar-cost averaging does not ensure a profit or shield you from a loss, people who use dollar-cost averaging generally tend to pay less per share over time than those who purchase shares all at once.
See related FAQs for details about Section 423 tax-qualified ESPPs and why they are a great deal.
|What are the 10 most important financial-planning rules for employee stock purchase plans?|
Before you participate in your company's employee stock purchase plan (ESPP), understand the following essential points for financial planning with ESPPs.
1. Set goals. Understand the value of your ESPP participation and how it fits into your life. What exactly do you want to do with the proceeds from the eventual sale of the shares? This consideration should include important life events and planning goals.
2. Know what type of ESPP you have. There are two types of ESPPs: tax-qualified and nonqualified. It is vital to know which you have.
3. Find out how purchase periods work, and understand the ESPP life-cycle. During a purchase period, payroll deductions are accumulated. The offering period and the purchase period can be the same length (e.g. six months), or the offering period can comprise two or more purchase periods. You should know the following: the maximum you can contribute (considering both your plan's rules and your available cash); whether you can increase or decrease your contribution amount during an offering; and how you can withdraw from the offering.
4. Understand purchase discounts and lookbacks. Your company will specify the discount before the offering begins. If your plan has a lookback feature, the discounted purchase price that you pay is based on the stock price at either the start or the end of the offering period, whichever is lower.
5. Learn the impact of job termination. If you leave the company, you will continue to own shares purchased for you during your employment, but your eligibility for participation in the plan ends.
For the next 5 topics to know before participating in an ESPP, see the full FAQ. To read a detailed discussion of all the topics mentioned in the FAQ, see the in-depth article on financial planning for ESPPs.
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|Articles, Videos, And Other Resources On ESPPs|
Below we list selected articles, videos, and podcasts about ESPPs in the award-winning content of myStockOptions.com. The extensive section on ESPPs at myStockOptions.com is complemented by an interactive quiz and a self-study course and exam for CFP and CEP continuing-education credits. All of this content is available with Premium or Pro Membership or through corporate licensing.
Six ESPP Essentials, by the myStockOptions editorial team
This two-part article series explains important ESPP aspects and concepts in plain English. Part 1 discusses the basics of ESPP participation, such as enrollment rules, plan types, and offering/purchase periods. Part 2 covers holding periods, tax rules, and the impact of various events, both personal (e.g. job loss) and corporate (e.g. M&A).
ESPPs 101: Key Dates And Terms You Must Know, by the myStockOptions editorial team
Your employee stock purchase plan (ESPP) may be one of the best benefits your company offers. However, to maximize its value, you must know its key dates and terms. This article explains the basics you need to know for your ESPP participation.
ESPPs 101: Taxation Made Simple, by the myStockOptions editorial team
To make the most of your company's ESPP, you must understand the tax consequences of participation. This two-part article series explains the basics of ESPP taxation.
Fundamentals Of Employee Stock Purchase Plans, by Alisa Baker
Your company's employee stock purchase plan (ESPP) may be one of your best employee benefits. 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.
The Great Benefits 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.
Ten Financial-Planning Rules Every ESPP Participant Should Know, by the myStockOptions editorial team
Employee stock purchase plans (ESPPs) are a super deal. However, the related taxation and financial planning can be deceptively complex. This article presents the essential points that you should understand before you participate in your company's ESPP.
ESPP Contribution Limits And Why They Matter To You, by Bruce Brumberg
If you are enrolled in a tax-qualified employee stock purchase plan, the amount of company stock that you are allowed to purchase is limited. You will want to keep this in mind when you allocate part of your salary to your ESPP. Read this article to understand how the contribution limits affect your ESPP planning.
IRS Form 3922 For ESPPs: What You Need To Know, And How It Can Help You Understand ESPP Taxation, by Bruce Brumberg
Stock purchases made through an ESPP during a calendar year are reported to you and the IRS on Form 3922 early in the following year. This article explains what you need to know about the information on the form, and how the form can help you better understand the complexities of ESPP taxation.
Employee Stock Purchase Plans And 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.
Employee Stock Purchase Plans (ESPPs): Core Concepts & Benefits
Running time: 3:35. Bruce Brumberg, the editor-in-chief of myStockOptions.com, clearly explains both the fundamentals of employee stock purchase plans (ESPPs) and the benefits that ESPPs can provide. Using animated examples, this video covers key ESPP concepts, including the offering period, the purchase date, lookbacks, and discounts.
Employee Stock Purchase Plans (ESPPs): Key Rules & Decisions
Running time: 2:53. Bruce Brumberg, the editor-in-chief of myStockOptions.com, clearly explains the important rules you must know and the key choices you will have to make when you participate in an employee stock purchase plan (ESPP). Topics include ESPP features and the related basic financial-planning concepts.
Employee Stock Purchase Plans (ESPPs): Taxes
Running time: 4:24. Bruce Brumberg, the editor-in-chief of myStockOptions.com, clearly explains the five key tax rules you must know when you participate in an employee stock purchase plan (ESPP). Illustrated by animated examples, the covered concepts include the special rules that depend on how long you hold the shares.
Podcast! Basics Of ESPPs, by Bruce Brumberg
In this eight-minute podcast, the editor-in-chief of myStockOptions.com explains how ESPPs work, including enrollment, offering periods, lookbacks, purchase, and taxation.
Test your smarts with our free interactive quiz on ESPPs. In addition to being fun, the quiz is also a course of study. The answer key links to content on the topic for followup reading.
Employee Stock Purchase Plans: Qualified And Nonqualified Plans, by Bruce Brumberg
Bruce Brumberg, editor-in-chief of myStockOptions.com, developed this presentation 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. (Premium members may request permission to use the PowerPoint version at their companies.)
|Survey Shows Benefits And Popularity Of ESPPs|
Deloitte's 2018 Global Employee Stock Purchase Plan Trends Survey explored the use of ESPPs by over 300 multinational companies. While only 28% of the surveyed companies have considered offering a truly global ESPP, almost 75% of the surveyed companies do offer an ESPP in one or more countries. Rates of employee participation vary widely:
|Participation rate||Percentage of companies|
|Less than 25%||37%|
|25% to 50%||32%|
|50% to 75%||22%|
|More than 75%||10%|
Only about a third of the companies report participation rates above 50%, suggesting there is much room for improvement in promoting employee engagement in ESPPs. Other findings in Deloitte's survey:
- Most (62%) of these companies offer a tax-qualified ESPP, i.e. a Section 423 ESPP in the United States and its equivalents in other countries.
- 67% of the companies with ESPPs offer a 15% purchase discount, 27% offer a discount of less than 15%, and 6% offer a discount of greater than 15%.
- The most common length of offering period (at 41% of the companies) is three to six months.
- Most of the companies (74%) base their ESPPs on a discount structure rather than a company match structure (13%).
- Among companies with a plan structured on share matching: 44% report that employees receive one matched share for every two or three shares they purchase; 36% require a purchase of four or more shares to receive one matched share; 20% of companies require purchase of one share or less.
For more data on ESPPs, see our comprehensive FAQ on surveys and studies about employee stock purchase plans.
|New IRS Private Letter Ruling (PLR) On ESPPs Allows Loans|
IRS Private Letter Ruling 201911002 is the first IRS PLR on employee stock purchase plans in over 14 years. It focuses on whether allowing loans to participants for purchasing ESPP shares would disqualify the plan as a Section 423 ESPP. These types of ESPPs require that everyone who is eligible must have the "same rights and privileges" under Section 423(b)(5). If not, the ESPP is not tax-qualified. Although parts of the letter ruling were redacted, it appears that the IRS reached at least two conclusions:
- A participant's ability to use a loan from its employer or a third party to purchase the ESPP shares does not disqualify the plan.
- The inability of executives to use a loan to purchase company shares, as imposed by the Sarbanes-Oxley Act, does not mean the plan has different "rights and privileges" that violate the Section 423 rules.
The impetus behind this letter ruling is a program developed by fintech startup Carver Edison. It uses patent-pending technology to offer interest-free loans that partly involve a form of cashless ESPP participation. This innovation has the potential be an an overall boost for ESPPs.
|Tax Alert: IRS Restores Capital Gains Totals To Form 1040|
This tax season you did not directly report capital gains and losses on your Form 1040 tax return. Instead the capital gains total from Schedule D was reported on the new Schedule 1, with totals from that Schedule going onto the revised Form 1040. (See our article on this and other tax-return changes for the 2019 filing season.)
To put it mildly, the change was unpopular. Now, in the newly released draft Form 1040, total capital gains (or losses) is back on the body of the form (see Line 6) and not the schedule.
myStockOptions.com will continue to monitor IRS developments as the 2020 tax-return season approaches. Our Tax Center has a section on tax changes that you can peruse for details on all the recent tax updates that affect equity compensation and company stock.
|Visit myStockOptions At NASPP 2019|
We are excited about the NASPP's annual conference, being held this year in New Orleans (Sept 16–19). As always, myStockOptions.com will have its cheerful booth in the exhibit hall, where our editor-in-chief Bruce Brumberg will be available as an NASPP-designated expert to answer questions on stock plan education/communications and equity comp taxation. If you attend the conference, please stop by our exhibit booth for a chat and pick up a myStockOptions.com souvenir!
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|Need CE Credits? Learning Center At myStockOptions.com Offers Credits For CEPs, CFPs, And Other Professionals|
The myStockOptions.com Learning Center has courses of study and exams that offer:
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CPE for Certified Public Accountants (CPAs) and CE for CFA Charterholders (see the Learning Center for information)
The course on employee stock purchase plans covers all of the key information that you must know to be well informed about ESPPs. Like all of our courses of study, it features podcasts, videos, articles, and FAQs from myStockOptions.com. They are woven into a dynamic, interactive learning tool that teaches the topics in a memorable way. The answer key for each exam also links to relevant content on the site for further reading and learning.
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