
Employee Stock Purchase Plan (ESPP)
An employee stock purchase plan (ESPP) is a company-run program in which participating employees can purchase company stock at a discounted price. An employee stock purchase plan (ESPP) is a company-run program in which participating employees can purchase company stock at a discounted price. _An ESPP is a program in which employees can purchase company stock at a discounted price._ _Employees contribute through payroll deductions, which build until the purchase date._ _The discount can be as much as 15% in some cases._ At the purchase date, the company uses the employee's accumulated funds to purchase stock in the company on behalf of the participating employees. With employee stock purchase plans, the discount rate on company shares depends on the specific plan but can be as much as 15% lower than the market price.

What Is an Employee Stock Purchase Plan?
An employee stock purchase plan (ESPP) is a company-run program in which participating employees can purchase company stock at a discounted price. Employees contribute to the plan through payroll deductions which build up between the offering date and the purchase date. At the purchase date, the company uses the employee's accumulated funds to purchase stock in the company on behalf of the participating employees.



Understanding Employee Stock Purchase Plans (ESPP)
With employee stock purchase plans, the discount rate on company shares depends on the specific plan but can be as much as 15% lower than the market price. ESPPs may have a “look back” provision allowing the plan to use a historical closing price of the stock. This price may be either the price of the stock offering date or the purchase date – often whichever figure is lower.
Qualified Vs. Non-qualified Plans
ESPPs are categorized in two ways: qualified and non-qualified. Qualified plans require the approval of shareholders before implementation, and all plan participants have equal rights in the plan. The offering period of a qualified ESPP cannot be greater than three years and there are restrictions on the maximum price discount allowable. Non-qualified plans are not subject to as many restrictions as a qualified plan. However, non-qualified plans do not have the tax advantages of after-tax deductions that qualified plans do.
Important Dates
Participation in the company ESPP may only commence after the offering period has begun. This period begins on the offering date, and this date corresponds with the grant date for the stock option plans. The purchase date will mark the end of the payroll deduction period. Some offering periods have multiple purchase dates in which stock may be purchased.
Eligibility
ESPPs typically do not allow individuals who own more than 5% of company stock to participate. Restrictions are often in place to disallow employees who have not been employed with the company for a specified duration – often one year. All other employees typically have the option, but not the obligation, to participate in the plan.
Key Figures
During the application period, employees state the amount to be deducted from their pay and contributed to the plan. This may be subject to a percentage limitation. In addition, the Internal Revenue Service (IRS) restricts the total dollar amount to be contributed to $25,000 per calendar year. Most ESPPs grant employees a price discount of up to 15%.
Dispositions
The taxation rules regarding ESPPs are complex. In general, qualifying dispositions are taxed during the year of the sale of stock. Any discount offered to the original stock price is taxed as ordinary income, while the remaining gain is taxed as a long-term capital gain. Unqualified dispositions can result in the entire gain being taxed at ordinary income tax rates.
Related terms:
Accumulated Fund
An accumulated fund is where budgetary surpluses are held by a non-profit organization and is analogous to the profit of a regular corporation. read more
Deferred Compensation
Deferred compensation is when part of an employee's pay is held for disbursement at a later time, usually providing a tax deferred benefit to the employee. read more
Employee Stock Ownership Plan (ESOP)
An employee stock ownership plan gives workers ownership interest in the company. read more
Incentive Stock Options (ISOs)
An incentive stock option (ISO) is an employee benefit that gives the right to buy stock at a discount with a tax break on any potential profit. read more
Market Price
The market price is the cost of an asset or service. In a market economy, the market price of an asset or service fluctuates based on supply and demand and future expectations of the asset or service. read more
Payroll Deduction Plan
A payroll deduction plan is when an employer withholds money from an employee's paycheck, most commonly for employee benefits and taxes. read more
Payroll
Payroll is the compensation a business must pay to its employees for a set period or on a given date. Read about payroll accounting here. read more
Qualifying Disposition
Qualifying disposition refers to a sale, transfer, or exchange of stock that qualifies for favorable tax treatment. read more
Statutory Stock Option
A statutory stock option is a type of tax-advantaged employee stock option offered to employers by employees. read more
Unemployment
Unemployment is the term for when a person who is actively seeking a job is unable to find work. read more