How to Take Advantage of Employer Stock Purchase Plans

August 3, 2024

Let’s be honest – employee stock purchase plans (ESPPs) aren’t always the flashiest benefits you’ll find. They can sometimes feel a little…complicated. But they can actually be a really smart move for your long-term financial future, especially if your company is doing well. Essentially, an ESPP gives you the opportunity to buy your company's stock at a discounted rate. Sounds good, right? Let’s break down how it works and how to make the most of it.

What Exactly Is an ESPP?

An ESPP allows employees to purchase company stock at a discount, typically between 15% and 20%, compared to the market price. It's usually done through payroll deductions, making it incredibly convenient. You don't need to worry about managing your own brokerage account. Your company sets up a pool of funds, and you contribute a portion of your paycheck (usually on a pre-determined schedule, like bi-weekly or monthly).

How It Works – A Step-by-Step Guide

Enrollment: The first step is to simply sign up for the ESPP offered by your employer. HR will usually provide details, including eligibility criteria, contribution limits, and the plan schedule.
Contribution Limits: ESPPs usually have both a company-imposed limit and an IRS limit. The IRS limit (for 2024) is $30,000 per year. Your company might set a higher limit, but you can’t contribute more than the IRS allows.
Discounted Purchase Price: When the company’s stock price is low, you’ll be offered the chance to buy shares at the discounted rate. This is often triggered when the stock price dips.
Holding Period: You typically hold the shares purchased through the ESPP until you leave the company. Once you leave, you’ll have a vesting period (usually 90 days) after which you can sell your shares.
Sale of Shares: When you sell, the proceeds are paid out to you, after any applicable taxes are deducted.

Key Considerations – Don’t Just Sign Up Automatically!

Company Performance: ESPPs are most valuable when your company is performing well. If the company’s stock price is consistently low, the discount might not be significant.
Tax Implications: The stock purchased through an ESPP is considered a “disposition” for tax purposes. This means you'll pay ordinary income tax on the discounted price plus any interest earned. It’s crucial to understand these tax implications before participating. Consult with a tax advisor for personalized advice.
Vesting Periods: Be aware of the vesting period after you leave the company. It’s generally 90 days, but check your plan details.
Diversification: Don't put all your retirement eggs in one basket. An ESPP should be part of a diversified investment portfolio.

Resources to Learn More:

IRS Publication 529: https://www.irs.gov/publications/p529
Your Company's HR Department: They are your best resource for specific details about your employer's ESPP.

Do you have an ESPP? Share your experiences in the sections below!