Employee stock purchase plan

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In the United States, an employee stock purchase plan (ESPP) is a means by which employees of a corporation can purchase the corporation's capital stock, or stock in the corporation's parent company, [1] often at a discount. [2] Employees contribute to the plan through payroll deductions, which accumulate between the offering date and the purchase date. On the purchase date, the company uses the accumulated funds to purchase shares in the company on behalf of the participating employees. The amount of the discount depends on the specific plan but can be around 15% lower than the market price. [3] [4] ESPPs can also be subject to a vesting schedule, or length of time before the stock is available to the employees, which is typically one or two years of service.

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These stocks are not taxed until they are sold. [5] If the holding is tax-qualified, then the employee may get a discount. [6] Depending on when the employee sells the shares, the disposition will be classified as either qualified or not qualified. If the position is sold two years after the offering date and at least one year after the purchase date, the shares will fall under a qualified disposition. If the shares are sold within two years of the offering date or within one year after the purchase date the disposition will not be qualified. [7] The majority of publicly disclosed ESPPs in the United States are tax-qualified plans that follow the rules of Section 423 of the IRC. [8]

ESPPs differs from other types of employee stock ownership, such as Employee Stock Ownership Plans (ESOPs) in how the stocks are bought, access to the stocks (either after vesting or upon retirement), taxation for the employees, and how much these plans cost to implement for the company.[ citation needed ]

In the United States, the participation rate for ESPPs is around 30%. [3] Many employees do not exercise their stock options for various reasons, including lack of cash flow. [9] [10]

In 1975, the Tax Reduction Act granted employers tax benefits on contributions to employee stock purchase plans. [11]

See also

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<span class="mw-page-title-main">Employee stock option</span> Complex call option on the common stock of a company, granted by the company to an employee

Employee stock options (ESO) is a label that refers to compensation contracts between an employer and an employee that carries some characteristics of financial options.

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<span class="mw-page-title-main">Share (finance)</span> Unit of equity ownership in the capital stock of a corporation

In financial markets, a share is a unit of equity ownership in the capital stock of a corporation, and can refer to units of mutual funds, limited partnerships, and real estate investment trusts. Share capital refers to all of the shares of an enterprise. The owner of shares in a company is a shareholder of the corporation. A share is an indivisible unit of capital, expressing the ownership relationship between the company and the shareholder. The denominated value of a share is its face value, and the total of the face value of issued shares represent the capital of a company, which may not reflect the market value of those shares.

<span class="mw-page-title-main">Retirement plans in the United States</span>

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<span class="mw-page-title-main">Employee stock ownership</span> System giving employees stake in a companys ownership

Employee stock ownership, or employee share ownership, is where a company's employees own shares in that company. US employees typically acquire shares through a share option plan. In the UK, Employee Share Purchase Plans are common, wherein deductions are made from an employee's salary to purchase shares over time. In Australia it is common to have all employee plans that provide employees with $1,000 worth of shares on a tax free basis. Such plans may be selective or all-employee plans. Selective plans are typically only made available to senior executives. All-employee plans offer participation to all employees.

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Passive income is a type of unearned income that is acquired with minimal labor to earn or maintain. It is often combined with another source of income, such as regular employment or a side job. Passive income, as an acquired income, is taxable.

Incentive stock options (ISOs), are a type of employee stock option that can be granted only to employees and confer a U.S. tax benefit. ISOs are also sometimes referred to as statutory stock options by the IRS. ISOs have a strike price, which is the price a holder must pay to purchase one share of the stock. ISOs may be issued both by public companies and private companies, with ISOs being common as a form of executive compensation for public companies, and common as a form of equity compensation in private start-up companies.

Deferred compensation is an arrangement in which a portion of an employee's income is paid out at a later date after which the income was earned. Examples of deferred compensation include pensions, retirement plans, and employee stock options. The primary benefit of most deferred compensation is the deferral of tax to the date(s) at which the employee receives the income.

Restricted stock, also known as restricted securities, is stock of a company that is not fully transferable until certain conditions (restrictions) have been met. Upon satisfaction of those conditions, the stock is no longer restricted, and becomes transferable to the person holding the award. Restricted stock is often used as a form of employee compensation, in which case it typically becomes transferable ("vests") upon the satisfaction of certain conditions, such as continued employment for a period of time or the achievement of particular product-development milestones, earnings per share goals or other financial targets. Restricted stock is a popular alternative to stock options, particularly for executives, due to favorable accounting rules and income tax treatment.

Stock appreciation rights (SAR) is a method for companies to give their management or employees a bonus if the company performs well financially. Such a method is called a 'plan'. SARs resemble employee stock options in that the holder/employee benefits from an increase in stock price. They differ from options in that the holder/employee does not have to purchase anything to receive the proceeds. They are not required to pay the (options') exercise price, but just receive the amount of the increase in cash or stock.

Phantom stock is a contractual agreement between a corporation and recipients of phantom shares that bestow upon the grantee the right to a cash payment at a designated time or in association with a designated event in the future, which payment is to be in an amount tied to the market value of an equivalent number of shares of the corporation's stock. Thus, the amount of the payout will increase as the stock price rises, and decrease if the stock falls, but without the recipient (grantee) actually receiving any stock. Like other forms of stock-based compensation plans, phantom stock broadly serves to align the interests of recipients and shareholders, incentivize contribution to share value, and encourage the retention or continued participation of contributors. Recipients (grantees) are typically employees, but may also be directors, third-party vendors, or others. Business owners may offer phantom stocks as a way to reward and retain employees, however employees can only own phantom stock during the duration of their employment with the company.

Section 409A of the United States Internal Revenue Code regulates nonqualified deferred compensation paid by a "service recipient" to a "service provider" by generally imposing a 20% excise tax when certain design or operational rules contained in the section are violated. Service recipients are generally employers, but those who hire independent contractors are also service recipients. Service providers include executives, general employees, some independent contractors and board members, as well as entities that provide services.

<span class="mw-page-title-main">Stock</span> Shares into which ownership of the corporation is divided

Stocks consist of all the shares by which ownership of a corporation or company is divided. A single share of the stock means fractional ownership of the corporation in proportion to the total number of shares. This typically entitles the shareholder (stockholder) to that fraction of the company's earnings, proceeds from liquidation of assets, or voting power, often dividing these up in proportion to the amount of money each stockholder has invested. Not all stock is necessarily equal, as certain classes of stock may be issued, for example, without voting rights, with enhanced voting rights, or with a certain priority to receive profits or liquidation proceeds before or after other classes of shareholders.

An Employee Stock Ownership Plan (ESOP) in the United States is a defined contribution plan, a form of retirement plan as defined by 4975(e)(7)of IRS codes, which became a qualified retirement plan in 1974. It is one of the methods of employee participation in corporate ownership.

<span class="mw-page-title-main">Employee compensation in the United States</span>

Employer compensation in the United States refers to the cash compensation and benefits that an employee receives in exchange for the service they perform for their employer. Approximately 93% of the working population in the United States are employees earning a salary or wage.

In the United States, there is a widespread practice of employee stock ownership. It began with industrial companies and today is particularly common in the technology sector but also companies in other industries, such as Whole Foods and Starbucks.

References

  1. ↑ U. S. Master Tax Guide 2009. CCH. November 2008. ISBN   978-0-8080-1903-9.
  2. ↑ Dore, Kate (August 1, 2022). "Employee Stock Purchase Plans Can Carry 'A Big Risk,' Says Advisor. What to Know before Buying In". CNBC.
  3. 1 2 Babenko, Ilona; Sen, Rik (March 14, 2014). "Money Left on the Table: An Analysis of Participation in Employee Stock Purchase Plans". Review of Financial Studies. 27 (12): 2. doi:10.1093/rfs/hhu050. SSRN   2166012.
  4. ↑ CFP, Kate Dore (August 1, 2022). "Employee stock purchase plans can carry 'a big risk,' says advisor. What to know before buying in". CNBC.
  5. ↑ Pender, Kathleen. "How to avoid getting double-taxed on employee stock purchase plan". San Francisco Chronicle.
  6. ↑ CFP®, Kate Dore (August 1, 2022). "Employee stock purchase plans can carry 'a big risk,' says advisor. What to know before buying in". CNBC.
  7. ↑ Pender, Kathleen. "How to avoid getting double-taxed on employee stock purchase plan". San Francisco Chronicle.
  8. ↑ Baker, Alisa (2012). The Stock Options Book (13th ed.). Oakland, California: National Center for Employee Ownership. pp. 67–87. ISBN   978-1-932924-91-6.
  9. ↑ Engelhardt, Gary V.; Madrian, Brigitte C. (June 2, 2004). "Employee Stock Purchase Plans". National Tax Journal. 57 (2.2): 385–406. doi:10.17310/ntj.2004.2S.02. ISSN   0028-0283.
  10. ↑ Anderson, Tom (December 16, 2016). "Workers missing the point on employee stock purchase plans". CNBC. Retrieved February 21, 2024.
  11. ↑ Sarasota Herald-Tribune. Sarasota Herald-Tribune.
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