Employee Stock Purchase plan23/10/2022 0 By indiafreenotes
An employee stock purchase plan (ESPP) refers to a stock program that allows participating employees to purchase their organization’s stock at a discounted price. In some cases, organizations offer stock discounts as high as 15%. Rather than directly purchasing their organization’s stock, participating employees contribute to their plan through automatic payroll deduction.
Qualified Plans vs. Non-Qualified Plans
Generally, organizations offer two forms of employee stock purchase plans – qualified and non-qualified plans.
For an organizational-run qualified plan to be implemented, they must receive the approval of shareholders. Also, all qualified plan participants have equal rights, there must be restrictions on the maximum discount offered, and the offering period cannot surpass three years.
Conversely, non-qualified plans are not subject to as many limitations as qualified plans. However, non-qualified plans have less desirable tax implications compared to qualified plans.
Offering Date: The offering date is the period when payroll deductions begin.
Enrollment Period: The enrollment period is the period of time where you can choose to either enroll or deny entry into the purchase plan.
Offering Period: The offering period is an extension of the offering date. The extension can be as long as a maximum of 27 months.
Purchase Date: The purchase date is the final day of the purchasing period. It is when payroll contributions are used to buy organizational stocks.
Purchase Period: The purchase period is a subset of the offering period that generally occurs every six months.
Taxation of ESPPs
Tax charged on the discount allowed by the company as a benefit derived from your employment. The amount chargeable is the difference between the:
- Market value of the shares when they are purchased on your behalf
- Amount you pay for those shares.
Participation in the company ESPP may only commence after the offering period has begun. This period begins on the offering date, and this date corresponds with the grant date for the stock option plans. The purchase date will mark the end of the payroll deduction period. Some offering periods have multiple purchase dates in which stock may be purchased.
ESPPs typically do not allow individuals who own more than 5% of company stock to participate. Restrictions are often in place to disallow employees who have not been employed with the company for a specified duration often one year. All other employees typically have the option, but not the obligation, to participate in the plan.
During the application period, employees state the amount to be deducted from their pay and contributed to the plan. This may be subject to a percentage limitation.