Employee Stock Purchase Plan (ESPP)

## Employee Stock Purchase Plan (ESPP)

An ESPP is a benefit that allows employees to buy company shares at a discounted price using after-tax payroll deductions. Qualified ESPPs under IRC Section 423 offer favorable tax treatment.

### How It Works

1. **Enrollment**: Employees elect to contribute 1–15% of pay during an offering period.
2. **Accumulation**: Payroll deductions accumulate over a 6-month purchase period.
3. **Purchase**: At period end, shares are bought at the lower of the grant date or purchase date price, minus the discount (typically 15%).

### Example

Stock price at grant date: $100. Stock price at purchase date: $120.
Purchase price = $100 x 85% = $85. Immediate paper gain = $120 - $85 = $35 per share (41% return).

### Tax Treatment (Qualified ESPP)

| Holding Period | Discount | Gain Above Grant |
|----------------|----------|------------------|
| Qualifying disposition (2+ years from grant, 1+ year from purchase) | Ordinary income | Long-term capital gain |
| Disqualifying disposition | Ordinary income | Ordinary income |

### Contribution Limits

Employees may purchase up to $25,000 worth of stock per calendar year (based on the fair market value at the grant date). Most companies cap payroll deductions at 10–15% of salary.