What’s an employer stock purchase plan?
An Employer Stock Purchase Plan, better recognized by its abbreviation “ESPP” is a company’s internal program that allows an employee to purchase their stock at a discounted price. An ESPP works similar to a 401(K) plan, in the sense that it's a payroll deduction. The plan can be a qualified or non-qualified plan.
What’s the difference between the two?
A qualified plan allows you to purchase stock at a discounted price and delay paying tax on that discount until you exercise your options. A non-qualified plan doesn't offer the same tax benefits, meaning you pay tax on it at the time of purchase.
How does an ESPP work?
There are four phases of the employer stock purchase plan process. The first phase of the plan is called the grant phase. In this phase, the employee is given the option to purchase the stock at a discount up to 15%.
The second phase is called the offering phase, otherwise known as the accumulation period. In this time period, you’ll get to choose a percentage or dollar amount to be used via a payroll deduction to purchase your discounted company stock.
The third phase is called the transfer phase. This is the period after accumulation when the employer takes all of the money that you’ve set aside over the offering period and purchases the stock at the fixed discounted price. After the purchase, the shares will be transferred to you, along with any funds that were not used to buy stock.
The final stage is the disposition phase. The funds are now held in a brokerage account in your name, and you will be free to transfer, sell, or hold them at your discretion.
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