An employee stock purchase plan, or ESPP, can help you reach your financial goals and grow wealth. It’s an often overlooked but invaluable benefit and company perk most publicly traded companies offer.
Unfortunately, not all employees take advantage of their company’s employee stock purchase plan or understand the significant benefits of maxing out their ESPP, which could be the equivalent of a 2 or 3% raise.
Benny makes participating in your ESPP easy and accessible, regardless of your current financial situation. We give you cash to max out your ESPP benefit so you can take full advantage of your earning potential.
The first step in taking advantage of your employee stock purchase plan is understanding what it is and how it works. This article will answer some common questions from employees about their ESPP.
What Is An ESPP?
An employee stock purchase plan (ESPP) is an employer-provided benefit that allows you, the employee, to purchase shares of your company’s stock at a discounted price. You pay for the shares of your company’s stock or contribute to your ESPP through automatic payroll deductions.
While ESPPs are only available to employees of publicly traded companies, not all public companies give you the opportunity to participate in an ESPP.
Not sure if your employer offers an ESPP? Chat with us and we’ll check for you.
How Does an ESPP Work?
Similar to other company benefits, like a 401(k) match program or company-sponsored health insurance plan, ESPP contributions are automatically deducted from your paycheck. The difference is your ESPP contributions are withheld from your after-tax income, unlike regular 401(k) contributions.
Participating in your company’s ESPP is completely optional. The benefit of an ESPP is that you can purchase shares of your company’s stock at a predetermined discount, often up to 15%. Employees usually have the right to immediately sell these shares for full market value.
Are All ESPPs the Same?
No, the structure of each company’s employee stock purchase plan can vary.
Some common differences we see in ESPP plans include the following:
- The discount offered to employees
- The length of the offering period
- The number of purchase periods within the offering period.
Because every plan is different, it’s important to know how yours works so you can make the most of it.
What To Consider When Reviewing Your ESPP
Whether you’re considering joining your company’s plan or have already signed up and are exploring your options, here’s what you should consider when reviewing your ESPP.
- How much is the discount and how much can you contribute?
- How is the discount calculated? Is it based on the ending stock price or does it have a feature where it picks the lower of the start or ending stock price?
- Does the ESPP require holding onto your shares for a certain period after acquiring them, sometimes called a “lockup” or “holding period”?
- How will the earnings from the ESPP be taxed?
- How often are stock purchases made? Monthly? Quarterly? Every 6 months?
Benny gives you cash to take full advantage of your company’s Employee Stock Purchase Plan (ESPP). Get started with no impact on your credit score.
Should You Participate In An ESPP?
Yes, you should participate in an ESPP if you can afford to do so. Remember that your paycheck will be reduced by the amount of your contribution when you participate in an ESPP.
Generally speaking, if your company offers an ESPP and you are eligible to participate (some companies have unique eligibility requirements), you should contribute to your ESPP. ESPPs can be a great tool to build wealth and fast-track your personal financial goals. It can also be seen as an easy way to give yourself a raise without talking to your boss.
How Much Should You Contribute To An ESPP?
We believe ESPPs are a valuable investment tool that all employees should take advantage of. That’s why Benny gives you cash to max out your ESPP so you can make the most of this benefit.
The amount you can contribute depends on your plan. Some plans require you to select a fixed dollar amount, while others allocate a percentage of your paycheck; this can range anywhere from 1-15% of your eligible income.
The IRS also limits your total contribution to $25,000 worth of company stock per calendar year. The $25,000 amount is the value limit and not the Adjusted Maximum Annual Contribution Amount.
How Do You Enroll In Or Join An ESPP?
Enrolling in an ESPP can vary from company to company. Typically you enroll in an ESPP during the applicable “election” period or the “open enrollment” period set by your company.
We recommend confirming whether your company automatically enrolls new eligible employees in the ESPP or if you have to re-enroll in your ESPP each Period.
How Are ESPP Gains Taxed?
ESPPs can be categorized as either qualified and nonqualified dispositions.
What Is A Qualified Disposition?
This is regarded as preferential tax treatment on a portion of your ESPP gains. To qualify, you must hold the shares for at least two years from the grant date AND one year from the purchase date. Once you meet both of those requirements, the amount from the discount will be taxed at your ordinary income tax rate, and the remainder will be classified as a long-term capital gain (or loss).
What Is A Disqualified Disposition?
This means you sold the stock within two years after the grant date AND within one year from the purchase date. You will be taxed on the discount and any other gain at ordinary income tax rates.
Since tax situations and ESPPs vary, we always recommend consulting with a tax professional to assess your personal situation.
A Summary Of ESPPs
Employee stock purchase plans are an underutilized and valuable wealth-building tool. ESPPs allow you to purchase stock at a discounted rate through payroll deductions, and if you can afford to do so, you should participate up to the full amount.
Participating in your ESPP has never been easier. Benny gives you cash to max out your ESPP contribution. Our goal is to make ESPPs an accessible benefit for every eligible employee.
Use our calculator to figure out how Benny can help boost your income!
Looking for more information about ESPPs? Read how much you should contribute to your ESPP and FAQs about selling your ESPP.