ESPPs benefits in volatile/down markets
Tax traps with ESPPs in down markets
Six ESPP essentials: new article series
Survey shows what drives high ESPP participation


Think Twice insider trading prevention DVDs: educate, entertain, and jolt your employees and executives (see the ad below) Developed for both participants and professionals, an engaging online resource about nonqualified deferred compensation plans (see the ad below)

NASPP Annual Conference: The premier event for stock plan professionals features four days of critical and timely sessions, Nov. 1-4 in San Francisco (see the ad below)


While the stock market volatility of 2011 has affected both stock prices and market confidence, the long-term value of investing and employee stock compensation remains. We have updated and expanded our award-winning articles, FAQs, and interactive tools to help you understand the effects of market turbulence and appreciate the ongoing potential of company stock grants. For a full list of our articles on stock compensation and market volatility, see our recent press release.

An employee stock purchase plan (ESPP) is a good deal in any market conditions. This newsletter spotlights two of our FAQs about ESPPs in volatile and down markets, along with other content on essential ESPP topics.

We appreciate your interest in If you do not yet subscribe to Premium or Pro Membership, giving full access to our content and tools, this is a great time to upgrade. All of our content and tools are also available for licensing.

We'd love to hear from you by phone (617-734-1979) or by email ( with your comments or suggestions, whether on or on, our newest website, which is all about nonqualified deferred compensation.

If you're attending the NASPP annual conference in San Francisco (Nov. 1-4), please visit us at Booth No. 407.

—Bruce Brumberg (Editor-in-Chief)

Featured FAQs On ESPPs

What makes an ESPP a good deal even in down markets?

An ESPP cannot go underwater. Plus, with any lookback in the purchase-price calculation, the discount comes off the lower price of either the offering or the purchase-date market price, so a falling or volatile market does not work against you.

Example with 10% discount: Your company uses a 10% discount with a six-month lookback, the offering date price is $10, and the stock market price on the purchase date is $12. Your purchase price is thus $9. If instead the stock price had fallen to $8 on the purchase date, your purchase price would be $7.20. Even in the price-drop example you gain by 11% (80 cents spread at purchase divided by $7.20 purchase price). Plus, this is the appreciation on your money for just six months!

However, in a down market, you may not be able to purchase as much stock as you like. This depends on the amount of your payroll contribution (e.g. 10% of your salary). Furthermore, with a tax-qualified Section 423 ESPP, you are allowed to purchase only up to $25,000 worth of stock in a calendar year (see a related FAQ) based on the stock price at the start.

As a plus, in a down market your plan may provide that a longer offering period (e.g. 24 months) with a six-month purchase period automatically withdraws and then re-enrolls you. This lets you take advantage of the lower lookback price, both for the $25,000 calculation and for when the market rises (hopefully) during the full offering period.

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For more information on the Think Twice series, and a free white paper on insider trading prevention and education, see the Think Twice website. Qualified corporate buyers, including new IPO companies, can request free previews. Intranet licensing is available.

What are the tax traps with an ESPP in down and volatile markets?

ESPP taxation can be confusing, and even more so in a down market. 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. (With a non-tax-qualified ESPP, the spread at purchase is ordinary income.)

However, when you sell the stock early in a disqualifying disposition (sale immediately or within one year), the spread at purchase is ordinary income regardless of the sales price. With this early sale, you can have ordinary income even though you have no actual gain by the time you sell.

With a tax-qualified ESPP, the breakdown of ordinary income and capital gains can vary depending on when you sell the stock and its price, creating tax oddities.

Example: Start-date price $20, purchase-date price $10. The 15% discount results in an $8.50 purchase price.

Sale when stock price is $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 example, where the stock price rose after the purchase date, the early sale results in more capital gain income than the sale after one year did.It is usually better to have capital gains than ordinary income, as capital gains can be netted against capital losses.

For more on this topic and additional examples, see the article Fundamentals Of Employee Stock Purchase Plans (Part 4): Down Markets And Other Tax Topics.

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Six ESPP Essentials: New Article Series has begun a new article series: Six ESPP Essentials, explaining 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).

This engaging article series joins the other helpful ESPP content on, along with the ESPP podcast, interactive quiz, and self-study course for CFP and CEP continuing education credits. All of these are available for corporate licensing. Other ESPP articles include:

Key Dates And Terms You Must Know For Your Company's ESPP by Matt Simon
Your employee stock purchase plan 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.

ESPP Taxation Made Simple by Matt Simon
To achieve the full advantages of enrolling in your company's ESPP, you must understand the tax consequences of participation. This article explains the tax basics.

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 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.

Nonqualified Deferred Compensation:, A Complete Online Resource For Participants And Professionals

From the award-winning publishers of, features articles, FAQs, a glossary, podcasts, interactive quizzes, and a calculator, all to help you, your clients, or your executives understand and make the most of nonqualified deferred compensation.

  • Clear explanations of NQDC by experts
  • Financial planning, taxation, risks, job loss, and legal issues, along with core concepts
  • Appeals to plan participants, plan providers and administrators, financial advisors, attorneys, and companies with NQDC plans

For companies, education and communication are vital for ensuring NQDC plans work properly to motivate and retain vital executives, directors, and key employees. Companies can license our educational content and tools for websites, print materials, newsletters, and presentations.

For more information on, including its prestigious advisory board, see the About Us section of the website, and please contact us by phone (617-734-1979) or email (


Many observers have noticed that the employee stock purchase plans of companies in the western United States seem to offer better discounts and lookbacks for employees than do their counterparts elsewhere in the country. A recent analysis proves that this observation is more than just anecdotal. In a post on the NASPP Blog, Executive Director Barbara Baska presents her analysis of the NASPP's current survey data on ESPPs to compare ESPP practices in the western region with those throughout the US in general. Among the significant findings: 93% of ESPPs in the western region are Section 423 plans. This is much higher than the overall national percentage of 77%. Among the western Section 423 plans:

  • 89% offer a 15% discount (only 79% nationally).
  • 81% (only 66% nationally) base their purchase price on the beginning or ending FMV, whichever is lower.
  • 22% have 24-month offering periods (19% nationally).
  • 58% have six-month offering periods (48% nationally), while three-month periods exist at 9% (18% nationally), and 12-month periods occur at 8% (11% nationally).

Most importantly, the more generous ESPPs of western companies translate into higher levels of participation:

  • 48% of companies in the western region report participation of greater than 50%.
  • Throughout the US in general, only 29% of companies report achieving this level of participation.

For more surveys from various sources on ESPPs and their features, see a detailed FAQ in the ESPP section of

NASPP Annual Conference, San Francisco, Nov. 1-4
Learning and networking for stock plan professionals

Your stock plans are under siege from Congress, the SEC, investors, the media and the economy. You cannot afford to fall behind in this rapidly changing environment—all companies need to be considering new plan designs and it is critical that you—and your staff—have the best possible guidance. The NASPP Conference from November 1-4 in San Francisco brings together top industry luminaries to provide the latest essential—and practical—implementation guidance that you need.

Highlights of this year's program include:

  • The full picture of how Say-on-Pay, current economic conditions, and regulatory reforms are reshaping stock and executive compensation—and the real-world, practical solutions you need to respond to this rapidly changing landscape.
  • All the current hot topics in stock and executive compensation, including a round-up of regulatory developments over the past year.
  • Current trends and new opportunities in stock plan design, including TSR and other performance-based awards.
  • The latest news in tax developments, straight from the IRS and Treasury.
  • What to expect for the 2012 proxy season and best practices for executive compensation disclosures.
  • Critical accounting developments, and advanced financial reporting considerations.
  • The latest technologies and innovations in administrative practices.
  • Key international developments impacting overseas and globally mobile plan participants.

The NASPP Conference will be essential to ensuring you can keep up during a year of unprecedented change. With the most respected experts in the field, the 19th Annual NASPP Conference will be a "must" for anyone who has any role in design, oversight, or administration of stock and executive compensation. For more information and to register, see the NASPP website.


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