Company ESOPP...What to do with it?

[LuckyRugger]

I've been reading many post and messages on this forum for sometime now and enjoy most of them. I believe my wife and I are doing a good job in saving for your early retirement.

My wife has a ESOPP, Employee Stock Option Purchase Plan, where she can purchase up-to 10% of her base salary of her company stock at a discounted price. Late last year we decided to purchase all 10% because the discount (locked-in price) was good. Now, I'm not sure what I should do. Her company takes out of her pay check from Mar-Oct, to fund an account and once 100% of the funds are there they will purchase the stocks. We have an option to cancel or fund it externally from her bi-weekly pay.

My question is, should I fund it so we can purchase the stock now since the stock price is about 70-75% higher than her discounted price with money we have in our emergency/savings account? Once the transaction is complete I would sell a majority of the stocks and put the money back into our emergency/savings account.

What type of tax will we see on the gains if we sell right away?

 

[RunningBum]

I've never heard of an ESOPP. I know of an ESPP (Employee Stock Purchase Plan) and an ESOP (Employee Stock Ownership Plan), and employee stock options. But maybe your company just calls one of these by a different name.

This sounds mostly like an ESPP, but in the ones I've always been in, I contribute the 10% out of each paycheck during the 6 month (or whatever time) period. I could pull it all out before the 6 month period, but it really makes no sense because I get a discount on the lower of the beginning or end stock price. I don't have a choice on when it is bought, it happens at the end of the 6 month period.

If yours is really an ESPP, you are going to be taxed on the discount as ordinary income. Any difference in the actual sale price from the offering price will be a short term gain or loss. It you can hold it longer--two years after the start of the offering period in your case--the ordinary income you have to report could be lower, and the rest is a long term gain (or loss).

If you're getting a discount plus the stock has gone up a lot since the beginning of the period, it's a no brainer to buy the stock even if you have to sell it right away in an unfavorable tax situation. You'll still make out well.

If you really have a choice on when to buy it, then the rules sound different from an ESPP so I can't give advice on something I don't understand. Maybe there are different variations on an ESPP that I've just never seen.

Guide to Compensation in Stock and Options should cover all of the cases, and if it differs from what I've said, believe Fairmark because it's easy for me to explain this incorrectly.

 

[LuckyRugger]

It use to be called ESPP, but now they are calling it ESOPP, it changed last year when they went to 3rd party to manage the accounts. Her discounted price is like $18 something and it's hovering just under $32 now. So, it will be taxed at the time of purchase of the difference of the purchase price and the discounted price as income? Will the deductions just be taken out of just one of her paychecks or will it be spreadout?Then if the difference from when it was purchased and when we sell it will be long-term gains (losses). Do you typically still get quarterly dividens from ESPPs?

I don't mind keeping some shares of stock, since the have always paid a dividend, but I'd like to get the money back that we've invested out of it. I will probably just sell enough stocks to re-coupe the money we've invested + taxes.

 

[jblack]

So, it will be taxed at the time of purchase of the difference of the purchase price and the discounted price as income? Will the deductions just be taken out of just one of her paychecks or will it be spreadout?Then if the difference from when it was purchased and when we sell it will be long-term gains (losses). Do you typically still get quarterly dividens from ESPPs?

My megacorp used to have a pretty standard ESPP and here is what occured to me as a regular participant for a few years before they halted the program (b/c everyone was just in it for the discount and most immediately sold at the end of each period).

1. The discounted income was not taxed unless you sold. if you held the vested stock 21-24 months and then sold you were eligible for long-term capital gains treatment of the original investment (I think...) plus gains. if you sold prior to that they withheld everything at your normal income tax rate.
2. The deductions were taken out evenly across the investment period. at the end of the period (3 or 6 months) the accrued funds were used to purchase the stock. it was sort of like an escrow account in that regard.
3. Our stock did not pay dividends, but once the purchase event occured you owned the stock you had all rights associated with it. this included proxy votes, etc. I would guess that a stock that with dividends would pay them out but worth checking on.
4. Correct on the capital gains. you pay the difference between the actual purchase and sales price, but only qualify for long-term treatment if you hold it the requisite period (21 months for our plan).

I don't mind keeping some shares of stock, since the have always paid a dividend, but I'd like to get the money back that we've invested out of it. I will probably just sell enough stocks to re-coupe the money we've invested + taxes.

After a lot of consideration and research, I elected to participate in the plan but require myself to sell ALL the newly acquired stock ASAP....i.e. take the free money (company benefit) and run each period. The best argument I read for this was from an employee at MSFT with a similar plan at the time: what would you do if your employer had just given you a short-term bonus equal to the stock discount? Would you purchase that company stock, spend it, or invest in some other way?

If you want to invest it you can buy any equity on the stock market and hold long term to receive the lower capital gains treatment....at best the company plan might gain you a few months less in holding requirements, but wasn't worth it to me for associated risk.

 

[clifp]

LuckyRugger.

There are tax benefits to holding the stock for two years. All of the gains including the discounted price is treated as long term capital gains. If your wife intends to work for the company for a long period of time, than holding for two years and selling at the point is the most tax efficient method. Now there is is certainly risk to having both one income and a significant amount of assets (~25-30% of her salary) in a single company. I personally was comfortable holding that much of my old Megacorps stocks, your situation maybe be different and I wouldn't touch my emergency fund to hold stock simply to qualify for lower taxes.

BTW, the effective interest rate (IRR) for participating in this plans is more than 54% /year (for a 10% discount 72% for a 15% discount) , and that is only if the goes down during the 6 month period if it goes up it is a even better deal. So you are actually better off borrowing on credit card than not participating in these program.

 

[wrigley]

I work for a company that has an ESOP (Employee Stock Ownership Plan). www.esopassociation.org/about/index.asp

I pay nothing for shares of company stock. I am alloted shares annually based on my salary.

Mike

 

[brewer12345]

OP, these things are a no-brainer regardless of taxes. Were I in your shoes, I would sign up for the max allowed, sell as soon as the transaction cleared, and repeat every 6 months. Easy, risk free money: do NOT leave it on the table. I would not hold employer stock at all.