Please note, the material collected in this post is for informational purposes only and is not intended to be relied upon as or construed as advice regarding any specific circumstances. Consult your own financial, legal, and tax advisors. Although the information and sources provided are believed to be accurate,
EarnIn makes no guarantees regarding their accuracy or completeness and is under no obligation to update them.
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total rewards package that goes beyond salary and health benefits is a powerful tool for attracting and retaining talent. One increasingly valuable addition for companies seeking to diversify their benefits offerings is the employee stock purchase plan (ESPP).
An ESPP is a financial program that gives employees the opportunity to buy company stock, allowing them to share directly in the company’s growth and success. This not only helps strengthen employee financial well-being, but also helps deepen their connection to the business, increasing engagement, satisfaction, and long-term commitment.
What is an ESPP?
An employee stock purchase plan is a financial incentive some employers include in their
benefits packages, typically allowing team members to buy company stock at a discount. Purchases occur on a company-established schedule, helping employees work toward long-term financial security through consistent contributions to investment portfolios.
Participating employees enroll in the program and select a contribution level based on their
total compensation, up to a
maximum of $25,000. The employer deducts these funds from each paycheck during the investment window, which typically lasts three to six months. Once the window closes, the employer purchases company stock on behalf of its employees and deposits the shares into their investment accounts. Once the employer transfers the stock, employees can decide whether to hold, manage, or sell their shares.
There are two types of employee stock purchase plans.
Qualified employee stock purchase plan
Approval required from company shareholders.
Must be offered to all eligible employees under equal terms.
Offering period cannot be longer than 27 months.
Stock discounts cannot exceed 15%.
All taxes are deferred until shares are sold.
Nonqualified employee stock purchase plan
Nonqualified ESPPs are similar but do not follow
Section 423 guidelines. They don’t receive the same tax advantages as qualified ESPPs, but they offer more flexibility. Key elements include:
Shareholder approval not required.
Employers may offer a stock price discount above 15%.
No required holding period.
Plans can be reserved for select employees.
Discount is taxable upon purchase. Gains are taxed upon sale.
Both types of company stock purchase plans contribute to employees’ long-term
financial wellness. For even greater flexibility, many employers offer additional complementary perks, such as EarnIn’s suite of financial wellness benefits. Tools like EarnIn’s
on-demand pay enable employees to get up to $150/day, with a max of $750 per pay period in minutes,
starting at just $3.99 per transfer
and Credit Monitoring
can help employees build better financial habits. This kind of flexibility can be especially useful for managing everyday expenses like gas and groceries.
How does an ESPP work?
While specifics vary by company, an employee stock purchase plan typically follows these steps. HR teams should remind employees to review their organization’s actual ESPP documents for complete details and eligibility requirements.
1. Eligibility and enrollment
Employees must meet two eligibility criteria to participate in a stock purchase plan:
Employees who meet these criteria are typically eligible to enroll in the program, however businesses may set additional criteria based on their specific plan design.
2. Payroll deductions
The company deducts the agreed amount from a participant’s pay. Payroll deductions accumulate in the employee’s investment account until the end of the contribution period.
3. Stock purchase
At the close of the purchase period, the organization uses the employee’s payroll deductions to purchase company stock in their name. If the ESPP offers a discount, the company applies it to the shares’ market value.
The employer deposits shares into the employee’s independently managed account. Some purchase plans require that employees hold their ESPP shares for a specific period after purchase — usually three, six, or 12 months. Other plans restrict selling during company-imposed trading windows.
Employers should encourage participants to review the plan’s details before enrolling and consult a financial planner for additional advice.
4. Contribution adjustment (optional)
Employees can enroll again when the enrollment window reopens, maintaining or adjusting their contribution level.
ESPP contribution example
Upon meeting the two-year eligibility requirement, an employee enrolls in an employee stock purchase plan. She sets her ESPP contribution at $100 per biweekly paycheck, with payroll deductions occurring over a six-month contribution period. The ESSP on her paystub will add up to $1,300 in contributions over those 13 payroll periods.
The stock’s fair market value (FMV) is $90 at the time of purchase. The company offers a 10% discount, reducing the share’s price to $81. At that stock price, she can purchase 16 shares. After the stock purchase, Miriam can withdraw the leftover funds or use them to buy shares during the next ESPP period.
Consider these factors before offering an ESPP
In addition to determining eligibility criteria and whether to offer a qualified or nonqualified employee stock purchase plan, companies should evaluate the following considerations before launching the program.
Discount rate
The company establishes the discount rate for ESPP shares. The IRS limits qualified stock purchase plans to a maximum discount of 15%. Nonqualified ESPPs don’t have this same restriction and can provide deeper purchase price discounts.
Lookback provision
If the stock’s value increases during the contribution period, a lookback provision lets employees purchase shares at a lower price from the enrollment date. Along with the discount, this policy helps employees maximize their contribution.
Purchase periods
The company gathers payroll deductions during the purchase period, with stock purchases occurring at the end. So, if an employer offers a quarterly stock purchase plan, enrolled employees receive stock deposits after each three-month deduction cycle.
Money back
Employers must establish rules about whether to allow early withdrawal of funds deducted from employee paychecks during the purchase period.
Benefits of an ESPP
An ESPP offers significant advantages to both employers and employees. Team members enrolling in an ESPP enjoy:
Discounted stock price. Purchasing company stock at a discount reduces the financial threshold for investment, creating instant value.
Long-term wealth building. Consistent contributions make it easier for employees to invest regularly and build equity over time.
Flexible Participation. Most plans allow employees to adjust or withdraw contributions based on their financial situation.
Businesses that offer ESPPs encourage:
Enhanced total rewards offering: ESPPs add value to compensation packages, helping attract top talent.
Improved engagement and retention. Employees who own stock have a deeper connection to business outcomes and are more likely to stay and contribute to the company’s long-term success.
How are ESPPs taxed?
ESPP taxes depend on whether the employee participates in a qualified or nonqualified plan.
Participants in a qualified plan are only taxed when selling the stock. If the employee holds the shares for more than a year after the purchase date and more than two years after the offer date (the day they enrolled), the stock sale is considered a qualifying disposition. In this case, the IRS taxes the purchase discount (the difference between the FMV on the grant date and the actual purchase price) as ordinary income, and any profit becomes a long-term capital gain, enjoying a lower taxation rate.
If the employee sells ESPP stocks before the holding period expires, the IRS classifies the sale as a disqualifying disposition. The discount is still taxed as ordinary income, but it’s calculated based on the FMV on the purchase date, rather than the grant date. Profits from the sale are classified as short-term gains and taxed at a higher rate.
Employees enrolled in a nonqualified ESPP plan do not enjoy the same tax benefits as a qualified plan. Instead of deferring taxation until the stock is sold, the employee is subject to ordinary income tax upon exercising the option (based on that day’s fair market value). Any gains from selling nonqualified ESPP shares are subject to either short- or long-term capital gains tax, depending on how long the shares are held.
Frequently asked questions
What strategies can employers implement to complement ESPPs and improve employee financial wellness?
Companies can provide access to financial counseling to help employees budget for their ESPP contributions and manage their investments. Additional programs, like EarnIn’s financial wellness benefit, provide tools to help employees plan, budget, and save.
How can employers encourage employees to participate in an ESPP?
Employers encourage enrollment in the following ways:
Make the offer attractive. Offer discounted shares, lookback provisions, and company-matched contributions.
Emphasize tax benefits. Highlight tax advantages, like long-term capital gains treatment.
Educate employees. Explain the plan, highlighting how stock ownership benefits employees and gives them ownership of company success.
Simplify the process. Consider features like automatic reenrollment, a user-friendly ESPP platform, and access to support services.
What common pitfalls should employers avoid when offering an ESPP?
Like any investment, ESPPs come with risks.
Poor communication and education. Failure to communicate the benefits, mechanics, and tax implications can lead to employee confusion and disengagement.
Tax and compliance issues. ESPPs require specific filings, approvals, and disclosures, which vary by region. Noncompliance may result in fines or penalties.
Administrative obstacles. The record-keeping required to ensure compliance and track vesting schedules may place additional burden on accounting teams.
How EarnIn helps support your team’s financial wellness
Employee stock purchase plans offer a valuable opportunity for employees to purchase company stock at a discount, which can lead to financial gains and continuous investment growth. Qualified ESPPs also come with tax benefits, adding even more value to an employer’s compensation packages. These financial perks help enhance employee engagement and commitment by aligning personal financial success with the company’s performance.
Employers can supplement these long-term financial plans with short-term benefits, like
Earned Wage Access from EarnIn, to help employees cover everyday expenses and unexpected costs. With EWA, employees can get paid in minutes — up to $150 per day and a maximum of $750 per pay period
— starting at just $3.99 per transfer.
Employees can also utilize Credit Monitoring
to track their credit score and Bill Reminders
to stay on top of due dates and avoid late fees.
Pairing an ESPP with EarnIn helps give employees added financial flexibility.
Try EarnIn today at no cost to employers with no payroll or HRIS integration required.
Please note, the material collected in this post is for informational purposes only and is not intended to be relied upon as or construed as advice regarding any specific circumstances. Consult your own financial, legal, and tax advisors.
Although the information and sources provided are believed to be accurate, EarnIn makes no guarantees regarding their accuracy or completeness and is under no obligation to update them.
EarnIn is a financial technology company, not a bank. Banking services are provided by our bank partners on certain products other than Cash Out.
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