An employee stock purchase plan (ESPP) lets employees purchase company stock at a discount of up to 15 percent off of its fair market value. An ESPP isn't a retirement plan — that would be an employee stock ownership program (ESOP), in which your company contributes stock to a retirement fund. Instead, an ESPP allows employees to purchase stock and do what they want with it, whether that's selling the stock immediately or holding on to it for years. By starting an ESPP, you can:
Learn how ESPPs work
An ESPP doesn't provide employees with a 15 percent off coupon for buying stocks. To get the discount, they must have funds deducted from their paychecks.
I recommend: Read the
basics of ESPPs to see whether they'll appeal to your employees before you go through the expense of setting up a plan.
Learn the law
For employees to get the full benefits of an ESPP — namely for purchases of stock by employees to be tax-free — your plan must meet the requirements of Section 423 of the Internal Revenue Code.
I recommend: Look up the
Section 423 requirements to learn what's involved for both you and your employees.
Find an ESPP manager
While ESPP basics are easy to understand, the devil is in the (many) details.
I recommend: Rather than ask your own accountant to manage an ESPP, consider hiring a professional investment firm that specializes in them, such as
Mellon Investor Services,
Computershare or
Fidelity Investments.
Test your knowledge
Before you pitch an ESPP plan to your employees, make sure you have the lingo down pat so that you can answer their questions.
I recommend: MyStockOptions.com offers an ESPP quiz that you and your employees can take to test your understanding of this benefit program.
Get employees on board
Despite the "instant profits" that employees can make on ESPPs, the sign-up rate for such programs is low. A study by Hewitt Associates, a human resources consulting firm, found that only 37 percent of executives participate in their company's ESPP, and the numbers decline with the level of employment: Only 16 percent of administrative employees participate.
I recommend: Get advice on how to explain the
benefits of an ESPP to your workers.
Encourage employees to think long-term
Employees can sell the stocks they purchase through an ESPP immediately for quick profit, but selling quickly may not be the smartest thing they can do.
I recommend: Explain to your workers that
flipping their stocks will give them a quick financial boost, but keep them from earning far more in the years ahead.
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