What is an Employee Stock Purchase Plan?
An Employee Stock Purchase Plan (ESPP) is considered as an employee benefit plan which allows the eligible employees to purchase company stocks at discounted prices. ESPPs are generated to encourage employee ownership and provide employees with a financial stake in the profit of the company they work for.
Types of Employee Stock Purchase Plans:
An ESPP can be either a qualified employee stock purchase plan, but it depends on whether it fulfils specific requirements:
- Qualified Plan: A qualified plan should meet specific IRS requirements, like offering the same method to all the employees, limiting the amount of stock that employee purchases, and having a maximum offering period of 27 months.
- Non-Qualified Plan: A non-qualified plan does not meet these requirements but may offer more flexibility regarding purchase periods and discounts. However, non-qualified dreams may also come with additional taxes for the employees.
Is the Employee Stock Purchase Plan Pre-Tax?
No, the employee stock purchase plan is not pre-tax deductions. But the contributions to traditional retirement accounts such as a 401(k) contributions are paid similarly. The contributions to ESPP are generally made with after-tax dollars, meaning that the amount you contribute to the plan has already been subject to income tax.
Is the Employee Stock Purchase Plan Worth It?
Whether an employee stock purchase plan (ESPP) is worthwhile for you depends upon several aspects, such as the program’s conditions, the financial goals you have set for yourself, and your overall financial status.
An employee stock purchase plan (ESPP) allows workers to buy shares of their employer at a price lower than the current market value by as much as 15%. Employees can make a significant return on their investments in the company stock if the stock performs successfully.
On the other hand, employees run the risk of suffering financial losses if the stock price goes down.
Also, See: Section 125 Plan