Employee Stock Purchase Plans: A Guide To Understanding and Creating ESPPs

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An employee stock purchase plan, (ESPP) is a type of broad-based stock plan that allows employees to use after-tax payroll deductions to acquire their company’s stock, usually at a discount of up to 15%.

Employee Stock Purchase Plan ESPP for Beginners! DON’T START UNTIL YOU WATCH THIS!

What are the benefits of an ESPP?

ESPPs allow you to offer stock to your employees simply and with little financial cost. These programs offer your employees the options of selling early in order to turn their holdings into additional income, or holding on to the stock to add to their retirement benefits and savings.

ESPPs give your employees additional motivation to work hard, meet company goals and achieve higher sales or revenue for your business. It also helps the workplace by improving morale and helping employees feel personally invested in the growth and overall performance of the company.

You can also help your employees maximize their investment by offering a look-back deal. These deals allow them to buy the stocks at the lower of two prices. These two price options are the stocks value on the initial offering date or on the purchase date.

What is an employee stock purchase plan?

An employee stock purchase plan (ESPP) is a benefit that allows your employees to purchase company stock at a discounted rate, sometimes reaching 15%. Through the plan, each employees after-tax payroll deductions accumulate until they choose to purchase the stock. The company uses these deductions to purchase the stock on behalf of the participating employees.

Qualified versus non-qualified plans

There are two principal categories for ESPP. These are qualified plans and non-qualified plans. The major difference between the two is that qualified plans receive more restrictions from the IRS. These restrictions include:

How do ESPPs work?

ESPPs break down into three separate sections, each affecting the actions available to you or your employees. These sections are:

The enrollment period

The enrollment period is the time set aside to allow your employees to sign up for the program. During this time, they decide how much of their income theyd like to contribute toward purchasing stock. These contributions are often limited to about 10% of their income.

This is also a good time to inform your employees about the program, the way it works and the ways it benefits them. Since its mutually beneficial, consider encouraging enrollment through the use of town hall meetings or other Q&A formats to raise awareness of the program.

The offering period

The offering period is the time where the deducted contributions accumulate. The deductions begin on the first date of this period. Because of this, the offering period has the same specified start and end date for all employees taking part. It begins on the offering date and continues on until the end of its final purchase period. The offering period lasts for 12 or 18 months and often gets split into several purchase periods.

The purchase period

What defines a purchase period is its end date, called the purchase date. On the purchase date, the employer uses all the accrued deductions from the employees and purchases the stocks on their behalf. There are usually two or three purchase dates within any offering period. The purchase dates are always six months apart.

How to create an ESPP

Every employer can find a different path to creating and implementing their own ESPP, but if youve decided a plan like this is right for you, consider the following common steps to take:

1. Decide your goals

In order to implement an ESPP successfully, its helpful to know what the goals of the plan are going to be. You might hope to encourage day-to-day employee engagement, boost morale in the office or simply involve your employees in the companys success. Whatever your goals are, its helpful to decide them at the beginning so you can decide which plans work best in achieving them.

2. Do your research

There are many options on how to run an ESPP, so consider finding as much information as you can to figure out which one works best for you. You can conduct employee polls to discover what plans interest them, search online for plans other companies have implemented successfully or hire a tax or financial advisor to describe which options meet your budget.

3. Decide plan details

After youve done your research, youll likely know whether a qualified or non-qualified plan works best for you and your employees. You can also decide whether the company can match employee contributions, how long your offering period is, how many purchase periods to use and, if the company has several types of stocks, which ones to offer. Once youve selected each detail based on your research, you can start implementing your new ESPP.

4. Get shareholder approval

If youve decided on a qualified ESPP, shareholder approval is a requirement. Some companies may prefer this approval on non-qualified plans as well. Consider speaking with the shareholders about the benefits and specifics of your plan before they hold their vote, so they understand exactly what their vote is about.

5. Pick a service provider

Many financial companies offer their expertise in facilitating the accumulation of deductions and the purchase of stocks. There are many factors to consider, including:

It may be helpful to conduct research on several companies before you find one that matches your businesss values and falls within your budget, but selecting the right provider can help make the implementation of the plan go more smoothly.

6. Begin the program

Once you select all the specifics and have a service provider, you can train your managers and inform your employees about the plan, what benefits it offers and how they can enroll. You might start the enrollment period or pick the date which it will begin. Its helpful to maintain an information program for both managers and employees to answer questions they may have and encourage enrollment.

FAQ

Is an ESPP a good investment?

Are ESPPs good investments? These plans can be great investments if used correctly. Purchasing stock at a discount is certainly a valuable tool for accumulating wealth, but comes with investment risks you should consider. An ESPP plan with a 15% discount effectively yields an immediate 17.6% return on investment.

Is ESPP better than 401k?

The no-match 401(k) is significantly better than the ESPP. The tax arbitrage in the 401(k) translates into a 7.04% IRR. Pretty impressive, because the net-of-fees equity return is only 5.90%, so you gain a full 114 basis points (1.14 percentage points) in annual returns from the tax arbitrage.

What is a good percentage for ESPP?

Contribution Limits

A typical range for maximum salary contributions to an ESPP is between 10%-20%. It’s important to note that your ESPP contributions are based on your gross salary (before taxes or withholdings are deducted).

What happens to ESPP if you quit?

With employee stock purchase plans (ESPP), when you leave, you’ll no longer be able to buy shares in the plan. Depending on the plan, withholding may occur for months before the next pre-determined purchase window.

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