While neither the acronym ESPP nor the spelled‑out version—employee stock purchase plan—sounds particularly exciting, the financial rewards can be. When employers offer an ESPP, employees often have an opportunity to benefit meaningfully by using the program strategically.
Through an ESPP, you purchase company stock at a discount through payroll deductions and can later sell it at full market price. The details vary by employer, but the structure of most plans may allow employees to capture value with relatively limited risk.
At Modera, we consider broad diversification to be the hallmark of a thoughtfully designed portfolio. When your investments span thousands of companies and include bonds issued by both corporations and the U.S. government across different maturities, your financial plan may be less impacted by any one company’s missteps. This balance is essential to keeping your long‑term goals on track.
That’s also why concentrated exposure to your employer’s stock deserves careful consideration. If you work at a publicly traded company, your future is impacted by how the company’s stock performs (through how your bonus is calculated), and your financial security is influenced by how your company performs relative to peers and how it weathers challenges. Purchasing stock in your employer can seem unwise since it creates even more of a link between your and the company’s financial success. However, an ESPP may allow you to benefit from your employer’s stock program without taking on the same level of risk as a direct stock purchase.
How does an ESPP work?
A qualified ESPP allows employees to purchase company stock at up to a 15% discount, subject to an annual IRS limit of $25,000 based on the stock’s fair market value at the start of the offering period. Contributions are made through payroll deductions and used to buy shares during a set purchase window. Some plans also include a lookback feature, meaning the purchase price is based on the lower of the stock price at the beginning or end of the offering period.
| Scenario 1: Up 20% | Scenario 2: Flat | Scenario 3: Down | |
| Purchase price | $100 | $100 | $100 |
| Discounted (15%) price | $85 | $85 | $85 |
| Sale Price | $120 | $100 | $80 |
| Pre-tax Gain/Loss | $120-$85 = $35 | $100-$85 = $15 | $80-$85 = ($5) |
Who can participate in an ESPP?
If you have access to an ESPP, this benefit should be part of your benefits brochure, and accessible either via your workplace online portal or by contacting your HR department. Only publicly traded companies offer ESPPs. However, a small number of private companies now offer non‑qualified ESPPs, which follow different tax rules. The U.S. Securities and Exchange Commission offers a search tool through which you can see whether your company indeed offers one.
How long should I keep the ESPP shares, and how are they taxed?
When you sell your ESPP shares after their purchase, the difference in the discounted purchase price and the sale price will be taxed as ordinary income (same as with your paycheck). Most plans do not have a formal “lock‑up period”; instead, employees may be restricted by company trading windows or blackout periods. Selling the shares as soon as you’re able may help limit the risk associated with the company’s stock price. However, any significant decline in the value of your company’s shares can create losses, so even this strategy is not without risk.
If you hold on to the shares for more than a year after the date of purchase and for more than two years after the offering period starts (effectively, if the shares are held for more than two years), the gains in excess of the purchase price discount will be taxed at long-term capital gains rates, which are lower than ordinary income rates.
Employees also receive IRS Form 3922, which must be used to adjust cost basis when reporting the sale. This may prevent double taxation of the discount — a step many taxpayers overlook.
However, a disciplined strategy of selling your ESPP shares as soon as possible, capturing a benefit due to the discounted purchase price, while limiting exposure to the fluctuations of your company’s stock, can be a prudent strategy for most investors.
Modera advisers are experienced in helping eligible employee clients with stock options implement the strategies that may be the most advantageous for them. To learn more about how Modera can support your financial goals, contact us.
Learn more on how we work with executives: moderawealth.com/specialties/executives
