ESPP, What are the "Need to Knows"

Many companies offer ESPPs (Employee Stock Purchase Plans), in which money is deducted from your paycheck on a regular basis, in order to purchase discounted shares. In this article, we will discuss the "need to knows", to give you a quick overview of the benefits and terminology.

ESPP plans, often have an Offering Date (the first day of the Offering Period) and a Purchase Date (the last day of the Purchase Period). For example, you might have the following:

• Offering Date of May 1st, 2010
• Offering Period from May 1st, 2010 to April 30th, 2012 (2 years)
• Purchase Period from November 1st, 2011 to April 30th, 2012 (6 months)
• Purchase Date of April 30th, 2012

The dates and periods typically align with tax periods and the only purpose for the Offering Period, is to help calculate the discounted price for the employee. On the other hand, the Purchase Period is important, because this is the period for which the employer will withhold funds from the employee.

As an example, suppose your company, withdrawls $1,000 over six months (Purchase Period), of after-tax money from your paychecks. After six months (on the Purchase Date), if you are given stock at a 15% discounted price, you would be given $1,150 worth of stock.

Effectively, this is the same as if you purchased $1,000 worth of stock (on the Purchase Date) and the next day, it went up to $1,150. As such, this does not effect amounts that can be invested in tax-qualified retirement accounts. Also, as mentioned in money.cnn.com, you might sell immediately, including the $150 as ordinary income or you might sell after a year, including the $150 as a long term captial gain. Going the second route might be beneficial because capital gains taxes are typically lower.

To summarize, if you get a discount of 15% and are in the 20% tax bracket, effectively, the money you saved in the plan grew at 12%.

This post was reposted from http://finlit.biz/business/espp-what-are-the-need-to-knows/, originally written on January 28th, 2014.