Why Employee Stock Purchase Plans are Making a Comeback

By Stefan Schumacher, editor of The Payroll Blog

An employee stock purchase plan (ESPP) allows employees to buy company stock, typically at a discount. For example, a discount might be 10 percent lower than the stock's fair value market price at a certain date as determined by the plan. According to Internal Revenue Service (IRS) regulations, an ESPP must be in written or electronic form. These regulations also stipulate the requirements that an ESPP must meet. Under the terms of the plan:

• The ESPP is only available to employees of the employer corporation or a related corporation who want to purchase stock.
• Stockholders must approve the plan within 12 months before or after the plan is adopted.
• Employees cannot be granted an option if immediately afterwards the employee would own stock with 5 percent or more of the total combined voting power.
• Options must be granted to all employees with all of them having the same rights and privileges.
• The option price cannot be less than the lesser of an amount equal to 85 percent of the fair market value when granted; or not less than 85 percent of the fair market value when the option is exercised.
• Options cannot be exercised after the expiration of five years from the option granting date if the plan says the option price cannot be lower than 85 percent of the fair market value at the time the option is exercised; 27 months from the option granting date assuming the option price cannot be less than an amount equal to 85 percent of the fair market value at the time it is granted.
• For each calendar year that an option is outstanding at any time, no employee can receive options that allow the employee’s rights to purchase stock under an ESPP that accrues at a rate that exceeds $25,000 of the fair market value of the stock, as determined at the time the option is granted.
• Options are not transferable by the employee other than by will or the laws of descent and distribution. They are exercisable by the employee only during their lifetime.

Why ESPPs Are Attractive

With the improving economy, the labor market has become a bit more competitive. Consequently, ESPPs are making a bit of a comeback as employers of all sizes look for ways to retain valued employee, attract new hires and improve morale – this based on a recent survey from Fidelity Investments. As the employer, you have the ability to develop and customize an ESPP that makes the most sense for your particular situation. Quite often, a small company will have different goals for its ESPP compared to a large, well-established corporation.

How do employee stock purchase plans affect payroll?

Employees contribute to the plan through payroll 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 as much as 15 percent lower than the market price.

Other Resources
Forbes
Wikipedia

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