About ESPPs
Gain clarity and implement an action plan based on your
Employee Stock Purchase Plan
What in an Employee Stock Purchase Plan (ESPP)?
Compensation from your employer in the form of company shares, with some restrictions in place
An Employee Stock Purchase Plan (ESPP) is a corporate initiative designed for employees, allowing them the opportunity to acquire company shares at a reduced price.
Participants in this program contribute to it through automatic deductions from their paychecks, amassing these funds from the offering date and the purchase date. When that purchase date arrives, the company utilizes the accumulated contributions to acquire company stock on behalf of the participating employees.
The type of ESPP your Company Offers
Tax-qualified ESPPs
Also known as Section 423 ESPPs, enable individuals to acquire company shares at a discounted rate of up to 15% below the stock's market price, all while avoiding immediate taxation on the discounted value at the time of purchase.
The Internal Revenue Service (IRS) permits individuals to purchase shares worth up to $25,000 within a single calendar year, though companies may impose lower limits if they choose to do so. No taxes are incurred until the shares are sold, and there are no Social Security or Medicare taxes on the proceeds.
If the shares are held for the required statutory periods to qualify for favorable tax treatment, a significant portion of the gains is subject to long-term capital gains tax when the shares are eventually sold.
Nonqualified ESPPS
These work the same way as Tax-qualified ESPPs with one significant difference. The difference comes with the IRS rules and the favorable tax treatment of the qualified ones. The discount received at purchase produces ordinary income.
Things to know and plan for with your ESPPs
Having a proper financial plan that incorporates your ESPP is critical. Below are things we consider:
- Setting Financial Goals that include your ESPP strategies
- Understanding what type of ESPP your employer offers
- Know how your ESPP purchase periods work & and how that functions with your cash flow
- Understanding the Purchase Discounts offered and lookbacks
- Understanding what happens to your ESPP in the event you leave your job or are terminated
- Know the ESPP holding periods
- Understand the ESPP taxation and what is best option based on your situation
- Have a Strategy for the after the shares are purchased (Sell/Hold)
- Beware of overconcentration of your employer stock in your overall investment strategy (ESPP, RSU, ETFs, Mutual Funds, Etc.)
Key Options and
Strategies For Your ESPPs
Efficiently navigate your ESPPs and establish
a strategic plan
Have A Custom Plan For The Shares After Vesting
Understand the details of the ESPP you are offered
Know the Tax Impact
Review Concentration Risk in Overall Asset Management Strategy
Learn More About How We
Incorporate Your ESPP Into a
Comprehensive Financial Plan
We know the ins and outs of ESPPs. Gain the clarity you deserve by letting us help you navigate your situation and establish a plan that aligns with the rest of your finances.
Frequently Asked
Questions
Like a figure print, this answer is unique to each household. We start on the custom financial planning aspect with each household, which allows us to work through the goals and cash flow of each client.
This is quite common for the clients we work with. What started off as small amount has grown to a significant amount through stock price appreciation and additional vests over the years. They find themselves sitting on 6 – 7 figures in 1 or 2 stocks. Tax efficiencies are critical while we work through the custom financial planning and asset management process. While also being focused on the concentration risk.
Understanding the taxes
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