The Employee Stock Purchase Program (or ESPP) is a standard issue for most publicly traded companies, but especially big tech companies.
Some even have more free money buried in them than your 401k match.
So you 100% (maybe) want to maximize your contributions.
1. It’s worth at least $3,750 of free money.
With an ESPP you purchase company stock at a discount. The standard discount is 15%.
The IRS limits ESPP’s to an annual maximum of $25,000. So you chip in $21,250 and it magically turns into $25,000 worth of stock! Woohoo!
Many ESPP’s are even more generous than that. Some will give you a 15% discount from the stock price either on the date of purchase or the start of the purchase period six months prior, whichever is lower.
Some will even give you a 15% from the lowest daily close over each 6-month purchase period. Woah!
2. But you gotta sell immediately
A guaranteed 15% return on your money (or even more) is nothing short of a miracle.
The only way you could screw it up is to hold on to your stock while it tanks. If it drops 15% or more – goodbye guaranteed return.
The only way to lock it in is to sell the stock the very same day it’s purchased.
3. What about the taxes?
If you sell it the same day it’s purchased, there are no capital gains and therefore no capital gains tax.
The discount you receive in purchasing the stock, however, will count as ordinary income and will pop up on your W2 at the end of the year.
4. The exceptions
Throughout my career, I’ve seen enough variations to warrant the fine print.
In 2009, companies got rid of the discount altogether.
I’ve seen companies that require you to hold the stock for a certain period of time before you can sell it.
Just recently, I saw a company that completed the ESPP purchase on a Monday, reported earnings on Tuesday, and by the time the trading window opened on Wednesday, the stock had dropped 15%.
In conclusion
ESPP’s are USUALLY a great way to save money that’s out of sight, out of mind, AND get lots of free money.
But the devil’s in the details, so read the fine print.
