Employee stock purchase plans can carry ‘a big risk,’ says advisor. What to know before buying in


How employee stock purchase plans works

Typically offered to all employees, ESPPs may allow you to purchase company stock at a discount of up to 15%, capped at $25,000 per year for tax-qualified plans.

The plan collects after-tax contributions from each paycheck during an “offering period,” and uses the funds to buy company stock on a specific date.

“The gold standard for a plan is going to be a 15% discount with a lookback feature,” said Bruce Brumberg, editor-in-chief and co-founder of myStockOptions.com.

What to know before selling your shares

While it may be tempting to cash in your discounted shares, there are complicated tax rules to consider, including levies on the discount. The breakdown of regular income and more favorable long-term capital gains depends on when you sell.

Your employer may also require you to keep the shares for a set period of time. “Some companies have an additional holding period requirement,” Brumberg said. “They don’t want you to flip the shares.”

The gold standard for a plan is going to be a 15% discount with a lookback feature.

Bruce Brumberg

Editor-in-chief and co-founder of myStockOptions.com

Of course, there are other key details to confirm in the plan document.

You’ll want to know whether the ESPP is tax-qualified, which may offer savings, as well as how to enroll, the length of the offering period, purchase dates, how to make changes and what happens if you pull out of the plan, he said. 

Check ‘all the other boxes’ before an ESPP

Given these risks, experts may suggest an ESPP to compliment your 401(k), rather than as the primary way to save and invest. And you’ll still want to weigh your risk tolerance and goals before enrolling.

An ESPP may be worth considering if you’re already meeting your other financial goals, such as maxing out your 401(k), investing in a brokerage account, paying off debt or other savings goals, McKenna said.

It may work once you’ve “checked all the other boxes,” she said, but it may be better to focus on other planning opportunities first.



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