An employee stock purchase plan (ESPP) refers to a stock program that allows participating employees to purchase their organization’s stock at a discounted price. In some cases, organizations offer stock discounts as high as 15%. Rather than directly purchasing their organization’s stock, participating employees contribute to their plan through automatic payroll deduction.
An employee stock purchase plan (ESPP) is an organizational-wide stock plan that is offered to employees who meet specific requirements.
There are two main types of plans – qualified and non-qualified plans.
In order to enroll in an ESPP, it is beneficial to first educate yourself on eligibility, deduction, and taxation.
Qualified Plans vs. Non-Qualified Plans
Generally, organizations offer two forms of employee stock purchase plans – qualified and non-qualified plans.
For an organizational-run qualified plan to be implemented, they must receive the approval of shareholders. Also, all qualified plan participants have equal rights, there must be restrictions on the maximum discount offered, and the offering period cannot surpass three years.
Conversely, non-qualified plans are not subject to as many limitations as qualified plans. However, non-qualified plans have less desirable tax implications compared to qualified plans.
Discussed below is the employee stock purchase plan process from beginning to end.
Enrollment Period: The enrollment period is the period of time where you can choose to either enroll or deny entry into the purchase plan.
Offering Date: The offering date is the period when payroll deductions begin.
Offering Period: The offering period is an extension of the offering date. The extension can be as long as a maximum of 27 months.
Purchase Period: The purchase period is a subset of the offering period that generally occurs every six months.
Purchase Date: The purchase date is the final day of the purchasing period. It is when payroll contributions are used to buy organizational stocks.
Organizational employees must first be eligible to participate in employee stock purchase plans. Listed below are some of the restrictions regarding eligibility.
Cannot participate in an ESPP if an employee owns more than 5% of the company’s stock.
Must be employed with the company for a specific period of time. (e.g., 1 to 2 years).
ESPPs are a benefit. Employees are not obligated to participate in them.
Participants who meet requirements cannot be disallowed plan involvement.
Participating employees must be aware of income allocation in regard to employee stock purchase plans. Listed below are some of the methods money is contributed to the plan.
Participating employees state the amount of money they want to be deducted from their monthly or yearly payroll.
Payroll deductions accumulate between the offering date and the purchase date.
Once the participating employee reaches the purchase date, the organization uses the employee’s accumulated funds to purchase their company’s stock.
Listed below are the disadvantages of participating in an employee stock purchase plan.
If the share price decreases, employee morale, and motivation may decrease.
Ensuring the ESPP follows security and tax law guidelines can be challenging.
A large amount of HR functions goes into administering the stock purchase plan.
There are legal, tax, and administrative issues that go into setting up the plan.
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