Strategies for a Successful Employee Stock Purchase Plan

Employee Stock Purchase Plans

 Derek Jess By: Derek Jess

Many companies offer their employees the option of entering into an employee stock purchase plan (ESPP). There are perks to joining a program like this (hello, free money!), but there are also implications if not done correctly (taxes). 

At Plancorp, we’re here to set you up for success. This is a perk you should definitely take advantage of and we’ll explain why and how to set it up in a way that aligns with your goals.  

What is an Employee Stock Purchase Plan (ESPP)? 

An employee stock purchase plan is a company benefit that allows employees to buy company shares at a discount of up to 15%. They are typically offered as an employee incentive and give employees the opportunity to gain from company growth. Of the four types, ESPP is one of the most common forms of equity compensation employers can offer. Learn more about other types of equity compensation here.

How Does an ESPP Work? 

When an employee enrolls in an ESPP, contributions to the plan are made from regular payroll deductions. After six months, the employer uses the accumulated money to purchase stock at a discounted price. The stock will exist in the employee’s name until they decide to sell it, which can be at any point during the process.

Is an ESPP Worth It? 

If you’re unfamiliar with the stock market or how ESPPs work, we understand why you may have trouble deciding if this option is right for you. Here are several reasons you should consider enrolling in your company’s ESPP.

  • You get to purchase stock at a discount rate, which already saves you money.
  • ESPPs allow you to participate in the growth of your company.
  • They are a great way to build wealth.
  • ESPPs help you reach both short-term and long-term financial goals, depending on when you sell.
  • You don’t lose the stock if you quit your job.
  • You can sell at any point, just be aware of tax implications.

Strategies for a Successful Employee Stock Purchase Plan

Here are a few strategies for finding success with your ESPP.

1. Diversification 

It’s never a good idea to put all of your eggs in one basket. If you put all your money into your company stock and your company goes bust, you lose your nest egg. 

A better idea is to diversify your stock. This means spreading out your money among multiple companies or investing in broadly diversified mutual funds. You want to avoid having a major portion of your stock portfolio relying on the fortune of any single investment. 

2. Create a Stock Management Plan 

A stock management plan is a framework for making decisions based on the company stock you have now and grants of company stock you receive in the future. Do you sell and move to cash? Sell and diversify? Or do you just hang onto the stock and use it for long-term goals? 

Having a plan will help you manage the emotions tied to investing in the stock market. Sticking to a plan will allow logic and reason to reign rather than any emotions you may have about your company and its performance. A plan will also give you direction and keep you on the path toward your goals and alleviate any anxiety about investing by reducing indecision and increasing confidence.

3. Buying and Selling Consistently 

With an ESPP, you are able to sell stock fairly quickly after purchase. This is a great way to fund any cash gaps or short-term goals. If you are continuously putting money into an ESPP account when purchase periods open, and you sell your stock from the previous purchase date, you could have a big chunk of cash coming your way every six months.

Just note that when you sell, the discount you received on your company stock is considered additional compensation and you will have to pay taxes on it. All things equal, holding ESPP stock for more than two years after the offering date and one year after the purchase date will often result in the most favorable tax outcome. However, this should not be the only (or even primary) consideration when deciding to hold or sell. There’s no telling how the stock position will perform between now and then.

4. Tax Planning  

It’s important that you consider your ESPP in your tax planning strategy. While it's common to only sell ESPP shares, it can be difficult to understand how to do this. What makes it complicated is that you have to determine if you’re in a state of qualifying or disqualifying disposition. 

Before you sell your shares, you will need to determine whether there is a benefit to recognizing the income this year, or if it’s better to wait. Every situation is different and working with a trusted financial advisor can be beneficial because they will think about other items you may not have considered. Things like asset concentration and risk issues can come up later as well, so it’s important you consider the importance of that before making a decision.

Setting Up an ESPP 

Enrolling in an ESPP is a great way to help you meet your financial goals, both short-term and long-term. If you still aren’t sure about whether an employee stock purchase plan is right for you, check out this webinar with Plancorp’s Senior Wealth Manager Derek Jess. He shares information on how company stock can help fund your future and how to set yourself up for success.

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Disclosure:

This material has been prepared for informational purposes only and should not be used as investment, tax, legal or accounting advice. All investing involves risk. Past performance is no guarantee of future results. Diversification does not ensure a profit or guarantee against a loss. You should consult your own tax, legal and accounting advisors.

Plancorp is a registered investment advisor with the Securities and Exchange Commission ("SEC") and only transacts business in states where it is properly registered or is excluded or exempted from registration requirements. SEC registration does not imply a certain level of skill or training. Please refer to our Form ADV Part 2A disclosure brochure and our Form CRS for additional information regarding the qualifications and business practices of Plancorp.

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Derek joined Plancorp in 2018 after spending the previous three years of his career as a financial advisor in Boulder, Colorado. As a CERTIFIED FINANCIAL PLANNER™ professional, he is passionate about helping people make financial decisions tailored to the life they want to live. More »