In the

United States The United States of America (USA), also known as the United States (U.S.) or America, is a country primarily located in North America. It is a federal republic of 50 U.S. state, states and a federal capital district, Washington, D.C. The 48 ...

, 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 A holding company is a company whose primary business is holding a controlling interest in the Security (finance), securities of other companies. A holding company usually does not produce goods or services itself. Its purpose is to own Share ...

, often at a discount up to 15%. 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. 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. These stocks are not taxed until they are sold. If the holding is tax-qualified, then the employee may get a discount. 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. The majority of publicly disclosed ESPPs in the United States are tax-qualified plans that follow the rules of Section 423 of the

IRC IRC (Internet Relay Chat) is a text-based chat system for instant messaging. IRC is designed for group communication in discussion forums, called '' channels'', but also allows one-on-one communication via private messages as well as chat ...

. ESPPs differs from other types of

employee stock ownership Employee stock ownership, or employee share ownership, is where a company's employees own shares in that company (or in the parent company of a group of companies). US employees typically acquire shares through a share option plan. In the UK, Em ...

, 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. In the United States, the participation rate for ESPPs is around 30%. Many employees do not exercise their stock options for various reasons, including lack of

cash flow Cash flow, in general, refers to payments made into or out of a business, project, or financial product. It can also refer more specifically to a real or virtual movement of money. *Cash flow, in its narrow sense, is a payment (in a currency), es ...

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

References

{{Reflist, refs= {{cite journal , last1=Babenko , first1=Ilona , last2=Sen , first2=Rik , date=March 14, 2014 , title=Money Left on the Table: An Analysis of Participation in Employee Stock Purchase Plans , journal=Review of Financial Studies , volume=27 , issue=12 , ssrn=2166012 , page=2 , doi=10.1093/rfs/hhu050

External links

U.S.C. 26 § 423
– The requirements for setting up an ESPP

– An example of calculating taxable income

– More guidance

Participation in ESPP plans

ESOPs vs ESPPs
Employee stock ownership Investment Taxation in the United States United States federal taxation legislation

See also

References

External links