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What is an Employee Stock Purchase Plan?
An ESPP (Employee Stock Purchase Plan) is an employee benefit plan that offers employees a way to buy their company’s stock at a discount. ESPPs are designed to enable employee ownership of company stock and give employees a vested financial interest in the company’s profits.
Types of Employee Stock Purchase Plans:
An ESPP can be either a qualified employee stock purchase plan, but it depends on whether it fulfills specific requirements:
- Qualified Plan: A qualified plan meets the following IRS requirements: 1) The employer must offer the same method to all employees; 2) employees are limited in the amount of stock they can purchase through a qualified plan in any given calendar year; and 3) a qualified offering period cannot be longer than 27 months.
- Non-Qualified Plan: This plan does not meet these tests so that it may have more purchase periods and discounts available. On the other hand, non-qualified dreams may be followed by additional taxes for employees as well.
Is the Employee Stock Purchase Plan Pre-Tax?
The employee stock purchase plan is as far away from pre-tax deductions as active Payments: Traditional Retirement Contributions, like 401k contributions. You contribute to ESPP using after-tax dollars — in other words, you’ve already paid income tax on the money that you put into the plan.
Is the Employee Stock Purchase Plan Worth It?
The ESPP may or may not be worth it for you, depending on the specifics of the plan, what your financial goals are, and what your financial situation looks like overall.
For example, an employee stock purchase plan (ESPP) lets employees buy company shares up to 15% cheaper than the current market price. If the stock does well, then it can offer them a high return on their investment.
On the negative side, should the stock price fall, employees stand to lose money.
Also, See: Section 125 Plan
