If you work for a publicly traded company, it may offer something called an employee stock purchase plan (ESPP). This allows you to purchase company stock at a discount.
One friend recently asked: “I’ve never worked at a company that offered something like that. At initial glance, it seems like 5% free money.” Not so fast…
🧠 What you need to know
ESPPs allow employees to purchase company stock at a discount, often through payroll deductions.
To participate, you typically enroll during a time-boxed offering period set by your employer. Contributions to buy company stock are then made via payroll deductions, usually at a discount of up to 15%.
Different companies will have different rules, so take everything below with a grain of salt.
The primary benefit—the discount:
ESPPs allow you to buy company stock at a discount, a great potential benefit. For example, a $10K investment in company stock with a 5% discount is actually a $9,500 purchase, netting a $500 savings.
Important details:
Lookback provision: Because stock prices are volatile, many ESPPs include a lookback provision. This basically says that your purchase will be executed at the lower of the stock price at the beginning of the period or the end of the period.
Payroll deduction: Contributions to the ESPP are deducted from your paycheck.
⚠️ Words of caution
Delay in getting the shares:
It can take a few days after the purchase date for shares to end up in your account and be available to sell. There is always the risk that some company announcement or market news causes the share price to fall before you actually receive ownership of the shares.
Too much leverage to your employer:
Your financial success is already tied to your company’s financial success through your salary and stock or option grants. Purchasing more shares through an ESPP will increase your dependence on your employer.
Holding period:
If you hold the stock for a specific period (often a year), it qualifies for lower long-term capital gains tax. Selling it sooner could result in higher short-term capital gains tax.
Taxes:
You will likely have to pay ordinary income tax on the discount. If you’re planning on selling soon after purchasing, you won’t receive the benefits of long-term capital gains tax.
Look into the terms of your company’s specific program so you know all of the holding period requirements and tax implications.
🌟 How can Mezzi help?
Most of the of the major brokerage firms, including Fidelity, Schwab, and E*Trade/Morgan Stanley manage ESPPs on behalf of employers.
Do you have too much company stock?
Connect your ESPP to Mezzi to clearly view how your allocation to company stock impacts your overall wealth allocation across stocks, bonds, ETFs, and mutual funds with our Concentration and Allocation charts.
Stay on top of how your ESPP account is performing relative to your other taxable accounts and retirement accounts so you can make the right diversification decisions.
Mezzi supports connections to most ESPPs and is expanding access to others.
