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In summary, ESPPs are programs that allow employees to purchase their employer’s stock through a simplified payroll deduction. Not to be confused with Employee Stock Ownership Plans (ESOPs), ESPPs participants purchase stock at a discounted price with after-tax dollars.


Additionally, some companies allow employees to purchase stock with pre-tax dollars, similar to a traditional 401(k) contribution.


The Qualified ESPPs have more complicated rules. Also, non-qualified ESPPs are more common. Because of this, we will focus on after-tax, non-qualified plans for now.

ESPPs have a few general components, which contain dates and rules to keep in mind:


The Offering Period

This is the time frame that an employee is eligible to sign up for the plan. The offering period can last up to 12 months. Once the employee has signed up, payroll deductions will start almost immediately.


The Purchase Date and Period

The purchase period is essentially the date employees purchase stock on behalf of all participants using pooled funds.

To understand this concept, consider 100 employees who decide to contribute $20 per paycheck. Rather than execute a purchase of $2,000 every pay period, the employer may opt to set a monthly purchase date, where all funds are used for stock on behalf of the employees. These shares are usually offered at a 15% discount.


The Holding Period

The employee will need to hold the shares for one year after purchase and two years after the initial offering. This is called a Qualifying Disposition. Otherwise, the gains will be subject to ordinary income tax.

ESPPs can be part of a non-qualified bucket of assets for retirement. People saving for retirement incorporate it into their three streams of income, along with the invested stocks, bonds, and real estate.

Some clients at Sun Valley Financial that have a substantial amount of the company’s stock use covered call options to generate additional income through the paid premiums. Other individuals unwind their positions over time through tax harvesting.


Last word of advice

· Be sure to understand the ins and outs of the ESPPs by seeking advice from a financial or tax professional. This way, you can understand the tax consequences of buying and selling stock.


· Restricted Stock Units (RSUs), Incentive Stock Options (ISOs), and Stock Options live in the same realm but are not the same. We have seen individuals who have thought they were participating in ESPPs but were instead receiving stock from RSUs.


· If you are offered stock options, you should consider the impact of those options in your portfolio. You will want to review the options before they expire. If the company’s stock appreciates significantly over time, you could be leaving behind tens of thousands of dollars by letting your options expire.


· Diversify your portfolio. I often see people who forget or neglect to do this vital step. As the saying goes, “Don’t put all of your eggs in one basket.” When you purchase stock in your 401(k) and ESPPs, your portfolio may not have enough diversification to weather a market correction.


Sun Valley Financial works with employees from various publicly traded companies, such as CVS Health, UnitedHealth Group, McKesson Corp, and Tenet Health/Abrazo. Other companies in The Valley that offer ESPPs include Intel, Stryker, CarMax, Burns & McDonnel, and Wells Fargo.


Please contact SVF if you have any questions about the discussed programs or want to see if your employer offers an Employee Stock Purchase Program. As always, discuss these options with your tax and financial professional. That is all for now; until next time!