In the

United States The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country Continental United States, primarily located in North America. It consists of 50 U.S. state, states, a Washington, D.C., ...

, an employee stock purchase plan (ESPP) is a means by which employees of a corporation can purchase the corporation's

capital stock A corporation's share capital, commonly referred to as capital stock in the United States, is the portion of a corporation's equity that has been derived by the issue of shares in the corporation to a shareholder, usually for cash. "Share capi ...

, often at a discount. Employees contribute to the plan through

payroll A payroll is the list of employees of some company that is entitled to receive payments as well as other work benefits and the amounts that each should receive. Along with the amounts that each employee should receive for time worked or tasks pe ...

deductions, which build up between the offering date and the purchase date. At 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 In law, vesting is the point in time when the rights and interests arising from legal ownership of a property is acquired by some person. Vesting creates an immediately secured right of present or future deployment. One has a vested right to an ...

schedule, or length of time before the stock is available to the employees, typically one or two years of service. 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. These positions will have different tax implications. 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, Emp ...

, such as Employee Stock Ownership Plans (ESOPs), both 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. The majority of publicly disclosed ESPPs in the United States are tax-qualified plans that follow the rules of Section 423 of the IRC. Participation rates in the US in ESPPs is around 30%.

References

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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