What is an Employee Stock Purchase Plan?
The first thing to understand about an Employee Stock Purchase Plan (ESPP) is what it is not. This type of plan is not the same thing as an Employee Stock Ownership Plan (ESOP). The ESOP is a retirement plan that lets investors invest in the stock of the employer. An ESSP is a way to purchase stock in the company where you presently work.
This type of plan is considered a good way to acquire stock in your company. These plans are generally considered a good deal for those who participate because they can make it possible for you to buy stock at a bargain price without reporting income until you sell the stock. Some of the major pros to this type of plan are:
- As mentioned before a qualified ESPP can provide you with a discount.The bottom line means that the purchase price of the stock can be as much as 15% below the value of the stock at the time the price is established.
- One of the biggest benefits is that you do not have to deal with alternative minimum tax (AMT) when you buy shares under an ESPP.
- Most ESPP offer fairly typical terms which include features that are similar to incentive stock options, but few companies set them up that way. Instead, most companies offer an opportunity to buy stock at a favorable price through payroll deduction. In this way you are exercising an option if you choose to participate, but it is not quite the same as holding a stock option. The specifics of these plans will vary from one company to the next. You should keep in mind that your company's plan could be different, but here are some typical terms:
- If you want to participate, you will have to sign up by a particular date to have from 1% to 10% of your pay withheld to purchase company stock over a particular offering period.
- You should understand that money withheld from your paycheck will accumulate for that period of time, and then be used to buy stock at the end of the offering period. The price may be discounted as much as 15%, although businesses can offer a smaller discount or none at all.
- Some businesses will provide a "look back," so that the price you pay can be based on the price at the beginning of the offering period or at the end, whichever is lower. This is beneficial to the investors because with this type of plan, if the price goes up during the offering period you get an extra bargain.
- With most plans you can back out of the purchase and get your money back at any time until close to the end of the offering period. However you should realize that your last chance to withdraw may be a week or two before the end, so you should be sure to check this deadline.
You can benefit from participating in an ESPP in several ways. The first may be because it is a way of saving and investing with money that automatically comes out of your paycheck, (which is an excellent way to build wealth). If the company provides a discount, then your savings get a boost. Apart from the financial benefits, there is also something special about having a stake in your company's fortunes. Holding stock in the business where you work can provide a kind of satisfaction you will not get from other investments.Knowing that you are a direct part of the success of your investment can be highly satisfying as well.