How can engineers optimize their Employee Stock Purchase Plan (ESPP)?
Imagine that your employer offers an Employee Stock Purchase Plan (ESPP), which may allow eligible employees to purchase company stock at a discount! Understanding how and ESPP works can help you evaluate whether participation aligns with your finances goals and circumstances so you can better Engineer Your Finances.
If your employer offers the ESPP, make sure to read the plan specific rules as each plan is going to be a bit different, but here are some common items we see from plan to plan.
Many ESPPs allow eligible employees to purchase company stock at a discount, often up to 15%, subject to the specific rules of the plan.
Carryover rules allow for unused purchases from previous years of a multi-year offering to can carry forward to purchases in later years increasing that $25,000 capacity if needed.
You can likely get up to a 15% discount on purchases of company stock with this money!
You can sell or hold the stock after purchase, just be aware of taxes that may apply.
If your employer offers a plan with the option to purchase stock up to 15% of your income, decide how much you would like to contribute from each paycheck. This happens during what is called the "offering period". In most cases, you won't be able to increase your percentage outside this period, but many plans let you decrease or stop elections at any time so the decision should be made with this in mind.
Let's say you decided on 10% of your paycheck to the ESPP. Each pay period, you'll see 10% of your dollars allocated to the ESPP account. Plans will then purchase shares, often every three or six months from those dollars so you'll build up an account of cash, then all at once that cash will purchase stock in the company.
Under many ESPPs, eligible employees may purchase company stock at a discount to the market price. The benefit, if any, will depend on the terms of the plan and subsequent stock performance. This discounted purchase feature is one of the potential benefits available under many ESPPs. Eligible participants may be able to purchase shares at a discounted price, subject to plan rules.
After the stock is purchased, there's another decision to be made! After shares are purchased, employees may choose to sell the shares or continue holding them. The appropriate approach depends on an individual’s financial goals, investment risk tolerance, tax considerations, and personal circumstances.
The decision you make here will determine some of the taxes that you will pay.
Note, the following examples are hypothetical and provided solely for education purposes. Individual tax results will vary. Investors should consult their tax advisor regarding their own situation.
If you sell the shares immediately, the discount percentage is going to count as income earned for tax purposes for the calendar year.
Option A - For example, if you purchased $10,000 of stock at a 15% discount, the difference between the discounted purchase price and the fair market value at the purchase may be approximately $1,500. Actual tax consequences will depend on the individual circumstances and tax rules.
If you decide to hold the shares and remain invested, the above calculation will still apply, but future sales will be taxed according to the amount of time that you held the stock and the time from the start of the offering period. This is a little different than ISO and RSU plans.
Option B - For example, you wait at least two years after the start of the offering period and at least one year from the purchase date of the stock. You would be taxed ordinary income tax on the discount amount and long-term capital gains tax for the amount between the sale price and the fair market value on purchase. These are two separate taxes on separate parts of the shares.
Option C - As a second example, you sell the shares inside one year from purchase, but higher than the fair market value of the purchase, you'll owe ordinary income tax on the discount amount and short-term capital gains (also income taxes) on the difference between the sale price and the fair market value on purchase.
Employees may choose to sell shares shortly after purchase or continue holding them. The strategy selected should be based on the individual’s financial goals, risk tolerance, tax considerations, and financial situation.
One important note! In some very rare occasions known as non-qualified ESPPs, taxes are owed upon purchase so check the plan rules to determine if it's a qualified or non-qualified plan under IRS section 423.
For engineers with Employee Stock Purchase Plans as part of their workplace compensation, understanding the plan’s features, benefits, risks, and tax implications may help them make more informed decisions.
There are various tools and resources available to help employees understand workplace benefits and financial decisions. Our team at the Engineer's Financial Group LLC is available to discuss the concepts presented in this article and answer questions regarding workplace benefit programs.
We welcome the opportunity to discuss these concepts further and help you better understand the financial considerations associated with workplace benefits. Let's work together so you can Engineer Your Finances!
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This article reflects only the views and opinions of Aaron Gose, ChFC® FSCP® RICP® WMCP® and the Engineer's Financial Group LLC . This article is not a solicitation to buy or sell any securities. Investments involve risk. Consult your financial adviser and CPA for information specific to you.
Aaron Gose, Principal, Financial Adviser with the Engineer’s Financial Group, LLC®, Financial Adviser with Eagle Strategies, LLC, a Registered Investment Adviser, Registered Representative for NYLife Securities, LLC (Member FINRA/SIPC), a Licensed Insurance Agency. Eagle Strategies, LLC and NYLife Securities, LLC are New York Life Companies.
The Engineer’s Financial Group, LLC® is not owned or operated by New York Life or its affiliates.
Investing involves risk, including the possible loss of principal. The value of company stock may fluctuate and concentrated holdings in a single stock may increase investment risk. Past performance is not indicative of future results. Tax treatment depends on individual circumstances. Consult your tax advisor regarding your specific situation.
SMRU 9073362.1