Employee Stock Purchase Plans, commonly known as ESPPs, can be a valuable benefit for employees of publicly traded companies. However, before deciding to participate in your company’s ESPP, it’s crucial to understand the rules and risks associated with it. According to financial experts, around half of public companies offered an ESPP in 2020. The allure of an ESPP lies in the opportunity to acquire discounted company shares, which essentially translates to free money for employees.

While the idea of receiving a discount on company stock may sound appealing, deciding whether to participate in an ESPP should depend on various factors. It’s essential to evaluate your short-term financial priorities and comfort level with sacrificing cash flow during the offering period. Financial planner Kristin McKenna suggests that individuals with limited income should prioritize other financial goals, such as contributing to an employer’s 401(k) match, before considering participation in an ESPP.

ESPPs typically operate on an offering period, usually lasting six months, during which after-tax contributions are deducted from employees’ paychecks to purchase discounted company stock on a specified date. The best ESPPs offer a 15% discount with a “lookback provision,” allowing employees to purchase stock at the lower of the beginning or end of the offering period. This discount can result in significant savings for employees, but it’s important to be aware of the tax implications of selling the stock.

Recent surveys have indicated a growing trend in the offering of ESPPs with a 15% discount and lookback provisions. In 2023, 85% of qualified ESPPs offered a 15% discount, up from 70% in 2020. Additionally, 83% of plans included a lookback provision in 2023, compared to 64% in 2020. These trends suggest that more companies are enhancing the benefits of their ESPPs to attract and retain talent.

Before enrolling in an ESPP, it’s crucial to carefully review the plan documents to understand the plan’s qualification, tax treatment, offering period length, purchase dates, flexibility for changes, and ramifications of leaving the plan. The complexity of ESPP rules can be overwhelming, so it’s essential to seek guidance from financial experts to ensure that you make informed decisions.

While ESPPs can offer significant benefits in the form of discounted company shares, they come with inherent risks and complexities that require careful consideration. As financial planner Kristin McKenna aptly puts it, ESPPs can be likened to using a sledgehammer to kill a fly due to their intricate nature. However, for individuals willing to navigate the nuances of ESPPs, they can serve as a valuable financial lever to enhance their overall compensation package.

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