Leveraging Your Paycheck Through Your Company ESPP

June 20, 2017

Author: Judy McNary

Employee Stock Purchase Plans (ESPPs) are a benefit offered by over 50% of publicly traded companies, yet fewer than one-third of eligible participants use them.  This often-overlooked benefit is a great way to grow your wealth. Unlike other types of stock plans such as Incentive Stock Options (ISOs) or Nonqualified Stock Options (NSOs), generally any full-time employee can participate in an ESPP.  If you have already maximized your 401(k) contributions, the ESPP is a great way to further fuel your financial fire.

An ESPP allows employees the opportunity to purchase shares of company stock at a discount, typically between 5-15%, much higher than any savings account. To participate, enroll in the next offering of the plan and decide how much of your after-tax pay you want to earmark toward purchasing the stock. Purchase periods vary from one company to another but two six-month periods per year is common.  Once you enroll, that portion of your pay is set aside to purchase stock. At the end of each plan period your savings are used to purchase the stock. The price you will pay for each share depends on the specifics of your company’s plan; it may either be the last day of the period or the lower of the first and last days, less your employee discount.  You’ll receive the stock shares in a separate brokerage account and can choose to keep them or sell them. Taxes you owe depend on how long you hold the shares, the purchase price of the stock (after the discount), the closing price of the stock at the end of the plan period and the closing price of the stock at the beginning of the plan period. There are a few potential tax wrinkles but these are easily avoided.  If you think you’ll want to have the funds for some other purpose within the next two years, sell the shares the day you receive them.  You pay ordinary income tax on the discount you received on the shares.  If you’re bullish on your company’s prospects and don’t need the funds right away, hold on to them until two years after the offering date of the plan.  At this point, you again owe ordinary income on the gain from the discount but other gain is only subject to the more favorable long-term capital gains tax rates.

Risk is minimal for ESPPs. If you leave the company or change your mind about deferring money into the plan you can withdraw without penalty any time before the end of the plan period. The advantages, though, are clear.  You can use the ESPP as a savings vehicle, an investing vehicle or both.

Perhaps there is an ESPP in your company benefits handbook.  Take a look and if you find one, mark the next offering period on your calendar and plan to sign up.

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About Judy McNary

Judy is a founding partner of Confluence Financial Advisors. She transitioned to financial planning after a successful career in technology. She is passionate about helping families, individuals and entrepreneurs reach their financial dreams. She writes articles for University Parent and is the author of Coin: The Irreverent Yet Practical Guide to Money Management for Recent College Graduates. In her spare time, Judy enjoys skiing, swimming and scuba diving.