Benefit packages are crucial to attracting talented, high-level employees to a company. Basic things such as a 401(k), medical, and dental insurance are considered typical, so companies must do something to stand out and provide unmatched value. An Employee Stock Purchase Plan (ESPP) can help entice quality employees by offering them tangible growth opportunities to stay engaged and grow with the company in the long term.
Employee Stock Purchase Plans are programs within a company where employees can purchase company stock at a discounted price. They can purchase them through payroll deductions that build up over time to the selected purchase date. Then, when the purchase date arrives, the company uses the employee’s funds to purchase the stock on behalf of the employees.
How an ESPP works
The shares purchased through these programs can be as much as 15% lower than the market price. The specifics of the plan will determine the exact discount price, and they may use the price of the stock offering date or purchase date of the stock, depending on which figure is lower. This is to make sure the employees get the most value for their investment. How to calculate an employee stock purchase plan is based on the stock price, the specific regulations within the company, and the guidelines mentioned below.
As mentioned above, the offering period usually begins on the offering date, which in turn coordinates with the existing stock option plans. In a lot of cases, the purchase date will mark the end of the payroll deduction period. There can be multiple purchase dates throughout the year, but it typically occurs every six months.
There are two types of Employee Stock Purchase Plans: qualified and non-qualified. For qualified ESPP plans, all the existing shareholders have to give the company permission to implement the program. Also, the plan participants will have the same rights as the traditional shareholders. Non-qualified plans do not have as many restrictions, but also have fewer tax advantages than qualified ESPP plans. Qualified ESPPs also tend to have restrictions on the maximum discount allowable.
One regulation to note is that most Employee Stock Purchase Plans do not allow individuals who own more than 5% of company stock to enter the program. Also, only employees that have been at the company for one year or more can participate in an ESPP. For the most part, all employees will have the option, but not the obligation, to enroll in the plan.
How ESPP shares get taxed
The taxation regulations on Employee Stock Purchase Plans can get complex depending on the type of plan. If the ESPP is unqualified, the entire gain is subject to ordinary income tax rates. For the most part, on a qualified plan, the employee will be taxed for the year they purchased the stock. With these plans, any discount price given regarding the original stock price will be taxed as regular income, while any gains are taxed as a long-term capital gain. Once you know how to calculate an employee stock purchase plan, it is not difficult to determine how much taxes will be required from the investment.
Why a company should consider employing an ESPP
Employee Stock Purchase Plans create a more engaged and dedicated workforce within companies, according to a study by the London School of Economics. This also creates an ownership culture within the company, reducing turnover rates and strengthening the employee work culture.
Also, companies that offer ESPPs are usually eligible for more corporate tax deductions on their income as long as it is reported on the employees’ Form W-2. Another great benefit of offering these programs is the steady cash flow it provides for company growth and expansion.
Colonial Stock Transfer has over 35 years of experience building ESPPs that benefit their client’s company and employees equally. They develop plans that address each company’s specific needs because they know that every company is different and requires different execution methods. Colonial can help with all the important parts of the process, such as online plan access/enrollment options, the execution of share trades, preparation and filing of IRS forms, tracking the $25,000 employee contribution limit, and creating an escrow for cash payments to holders.
ESPPs provide great benefits for both the company and the employees. For a company, starting an ESPP program is an opportunity for steady capital, a more engaged workforce, and more tax deductions. The employees will also greatly benefit from this program by being able to accelerate their Long-Term Savings, supplement their cash flow, and eventually transfer their ESPP shares to a Brokerage Account in the future.