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Maximizing Benefits from Your Employer Stock Purchase Plan - ESPP

Maximizing Benefits from Your Employer Stock Purchase Plan (ESPP)

An Employee Stock Purchase Plan (ESPP) can provide a lucrative way to accrue extra savings, acquire stock at a discount, and participate in your company’s growth as a shareholder. This article will explain key dates, procedures, and how to make the most of your ESPP.

How to Enroll in an ESPP

If your company offers an ESPP, there will be a specific enrollment period, similar to benefit options like health insurance or dental coverage. During this period, you can decide to allocate a portion of your salary to purchase your company’s stock. Once the enrollment period ends, the offering period begins, which usually lasts for six months. It is during this period that you will notice deductions from your paycheck for the ESPP.

ESPP Stock Purchase Mechanics

The money deducted from each paycheck during the offering period goes into a company escrow account. These contributions accumulate and are used to purchase company stock on the Purchase Date. Your employer buys the stock at a discount of up to 15%. The shares are then deposited into an account under your name, where you can manage them as you see fit.

How to Profit from an ESPP

The main avenues for ESPP profitability lie in the purchase of discounted company stock and the lookback provision. Many companies include a lookback provision in their ESPPs, allowing the purchase price of the discounted stock to be the lower of the stock price on the offering date or purchase date. If your company’s stock price surges between these dates, combined with the 15% discount, your returns could be significant.

ESPP In Practice: A Case Study

To better comprehend how an ESPP operates, let’s take an example:

Danielle works at XYZ Co. She earns a base salary of $150,000. During the ESPP enrollment period, Danielle decides to dedicate 5% of her salary to the plan. XYZ’s offering period lasts for six months, during which the company buys stock at a 15% discount. Let’s recap:

  • Base Salary: $150,000
  • ESPP Contribution: 5% of her annual salary
  • Stock Discount: 15%

Let’s assume that when the offering period started, XYZ’s stock was valued at $20 per share. Six months later, on the Purchase Date, the stock value has risen to $30 per share.

  • Stock is purchased based on the lower price at the beginning of the offering period, which is $20 per share
  • Applying the 15% discount, each share is purchased at $17
  • Danielle’s ESPP contribution for the 6-month period is $3,750 (5% of her annual salary prorated for 6 months)
  • She thus acquires approximately 220 shares at $17 each.

If XYZ is currently trading at $30 per share, Danielle could immediately sell her shares for a total of $6,600 (220 x $30). Subtracting her initial investment of $3,750, Danielle has made a profit of $2,850. This gain will be taxed as ordinary income if she sells immediately.


 Risks and Conclusion

As demonstrated by Danielle’s case, an ESPP can be an excellent benefit if your company provides one. However, there are complexities involved, especially with taxation and the potential for incorrect cost basis reporting on personal tax returns. Additionally, company risk is another factor to consider, as poor stock performance can pose a financial vulnerability, especially if company stock forms a large part of your net worth. For expert guidance on maximizing your ESPP benefits, please feel free to contact us.


Important Disclosures

The information provided in this article is general information. It is not intended to be construed as investment, tax, or legal advice. This is not an offer or solicitation to buy, sell, or endorse any company, security, fund, or other investment vehicle. Investing involves risks including possible loss of principal. Past performance is no guarantee of future results and the opinions presented cannot be viewed as an indicator of future performance. Opinions are subject to change without notice.

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