Employee Stock Purchase Plans (Part 3)

by | Dec 28, 2022 | Wealth Management

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By:  Paul Horn, CFP®, CPWA®, Senior Financial Planner

As the final part of the series, we look at Employee Stock Purchase Plans (ESPP). Although these are not explicitly for executives, this is an important benefit that is not well understood and often underutilized. In case you missed Part 1 on Deferred Comp plans and Part 2 on Stock Options, read here and here, respectively.

Employee Stock Purchase Plan (ESPP)

While technically this is not specific to executive compensation, it is an important benefit offered by many employers that is underutilized and not understood.  An employee stock purchase plan (ESPP) allows any employee to purchase their employer’s stock, typically at a 5% – 15% discount. For example, if the stock is $20 per share and the company offers a 10% discount, the employee pays $18 per share and from day one they have a $2 gain on the stock. Typically, these stock purchases are done via payroll deductions like other benefits. Participating in an ESPP can be an important strategy to accomplish your financial goals. Getting a discount on your stock purchase and holding it so it can appreciate over time is a good strategy to accumulate wealth.

The taxes on ESPP plans can be complex since not all plans are the same. The discount is taxed as ordinary income at the time of purchase. You will then pay taxes on the gains of the stock when you sell it (either short-term or long-term capital gains tax depending on your holding period). Speak to a Certified Financial Planner™ professional to understand the tax rules around your particular plan.

Tips for ESPPs

  • ESPPs are a great way to accumulate wealth over time.
  • Work with a CFP® professional or tax professional to understand the tax implications of your plan.
  • Perform cash flow planning to help determine how much to contribute to an ESPP. You do not want to save so much that you have trouble paying monthly bills.
  • Be aware of stock concentration risk. We all remember Enron and the employees whose stock ended up being worthless.

As you can see, we have just covered the tip of the iceberg when it comes to understanding executive compensation. It is always best to work with a CFP® professional who can help you understand your benefits and put a plan together to maximize them.

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.

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