- Chris Cyndecki CFA, CFP®
Employee Stock Purchase Plans
Many companies offer a benefit called an Employee Stock Purchase Plan (ESPP), which allows employees to purchase their employer's stock with after-tax money. Many plans allow employees to purchase stock at a 15% discount with a look-back period of 6 months.
After signing up for the ESPP, the employee contributes to the plan through payroll deductions. The money accumulates into an account, and the employer purchases company stock for the benefit of the employee at the end of the contribution period (usually 6 months). If the plan includes a look-back period, the stock will be purchased at today's price or the price 6 months ago, whichever is lower. Example Assuming the stock is purchased at today's price, and the employee sells the stock immediately, the 15% discount is equivalent to a 17.65% return. For example: If you buy $100 worth of stock (current market value) for $85 (discounted price), and sell it immediately in the marketplace for $100, you've just realized a $15 gain on an $85 investment ($15/$85= 17.65%). However this $15 discount is generally categorized as ordinary income and taxes must be paid at marginal income tax rates. Separately ESPPs have a maximum contribution limit of $25,000 per year. An ESPP with a discount feature can be a great employer benefit. Ask your financial planner if contributing to your Employee Stock Purchase Plan makes sense in your specific situation.