Employee Stock Purchase Plan (Espp): What It Is & How It Works

Employee Stock Purchase Plan (Espp): What It Is & How It Works

So many employees don’t understand the benefit of an Employee Stock Purchase Plan (ESPP) because of a lack of understanding, they can’t take full advantage of this investment plan.

In this blog, you will read about the employee stock purchase program so you will know better about the company’s ESPP ( Employee Stock Purchase Plan) and take a good investment decision.

In simple words, ESPP meaning is an Employee stock purchase plan. An employee stock purchase plan (ESPP) is a program that gives the employee the stock of the company at a discounted price.

Once you enrol for the espp scheme, you will contribute some part of your salary for a fixed period of time as a part of espp scheme of buying shares of the company.

The capital gain in espp depends on the holding period of the shares. Rules and eligibility of espp can be different from company to company.

The participation rate in the US of ESPP is 30% It allows a 5%-15% discount on the stock to an employee of the company.

Employer gives this kind of opportunity to the only long-term employee who has proven their skills and worked efficiently for many years and has also been loyal. It strengthens the bond between employer and employee.

ESPP gives the benefit to employees to buy stocks from their salary at a discounted price.

Every employee can't have the privilege of this plan. You have to pay a 10 per cent penalty on early withdrawal if you cashed out your money before turning age 59 ½

How to enrol for your company's stock purchase programme

  • First, enrol for the program by clicking on enrol
  • Then open an account
  • Enter the required personal information
  • Add employment information
  • Select Email preferences
  • Review application
  • Confirm application
  • Agree on terms of the customer agreement
  • Start the procedure for plan enrollment
  • Select enrollment elections
  • Review
  • And submit elections
  • Confirm number

How can you make money out of an Employee stock purchase plan?

You can make a good profit out of the ESPP scheme if you use it correctly.

You can make wealth out of ESPP through long-term investing, and it is a way to automate savings into long-term investing. 

You can build wealth other than retirement funds such as 401k, IRA, or ROTH. 

You can take stocks at a discounted price and then turn them into IRA Roth, which will help you to make tax-free wealth.

You will buy shares at a discount and then sell them at a market price; after selling, you can contribute to your IRA Roth.

There are mainly two types of employee stock purchase plans.

  1. Qualified and 
  2. non-qualified

Qualified plan

In this plan, the employee can buy stocks at a discounted price without any tax.

Non-Qualified Plans

In non-qualified plans, there is some tax on the stock purchase.

Advantages of ESPP

  • Here are some benefits of the ESPP:
  • The employee gets discounted stocks.
  • The employee stock purchase program is easy and simple. 
  • It Increases the motivation of employees to work. 
  • It also gives organizational pride and Increases employee loyalty.

Disadvantages of ESPP

  • There are some disadvantages also os the ESPP ( Employee stock purchase program)
  • If the price of shares decreases, it will affect the employee 
  • It will also decrease motivation and morale.
  • Human resources give the most dedication to the administrative plan.   
  • Legal, tax, and administrative issues will go into setting up the plan. 

ESPP VS ESOP

Employee stock purchase plans and Employee stock ownership plans are the two most famous investment plans among employees.

There are some differences between them, as written below:

ESPP ( Employee stock purchase plan) is a plan that offers stock to the employee as a part of a public issue, whereas ESOP( Employee stock ownership program) is a plan that offers direct stocks to an employee.

Employee stock purchase scheme gives the option to purchase stocks on the spot at a discounted price, whereas ESOP gives the option to purchase at a later date.

ESPP has no vesting period because it gives stocks on the spot, whereas ESOP has a vesting period of a minimum of 1 year.

ESPP shares will be in a lock-in period of one year from the date of allotment, and ESOP Company will decide the share's lock-in period.

What is ESOP

Louis Kelso introduced the first ESOP scheme in 1956. ESOP is a retirement plan for the employee. 

Employees don't purchase shares with their own money. ESOP Employee stock option plan. 

In the ESOP scheme, employees can't take shares with them. An esop creates liquid capitals.

ESOP scheme is very popular among startups. In this program, the employee can buy shares of the company at a predetermined price later.

Eligibility to be part of ESPP

Every employee can’t have the privilege of an Employee stock purchase scheme. Shareholders who own more than 5% of shares of the company are not eligible for this plan.

Read more,

Why Us for ESOP

ESOP FAQs

ESOP Regulations

CONCLUSION

We hope that now you have complete knowledge of the employee stock purchase program & employee stock purchase scheme so you can take a good decision for your ESPP and make a decent profit on your company stocks return.

FAQs Related to Employee Stock Purchase Plan

1. Can ESPP make you rich? 

If employees use the Employee stock purchase scheme correctly, it is a great investment. It is come with a 15% discount and with 17% returns. So you will make a good profit out of this ESPP scheme. But it always comes with risk, so you must be careful before taking action.

2. What happens to your vested shares after you leave the company?

The shares that you purchased are yours to keep whether you continue to work for a company or leave the company. The employee will continue to own his shares of the company if the employee has vested it or converted it into stocks.

3. Is an Employee stock purchase plan a good idea to make a side income?

Suppose you have a good investment vision and skills in investing and know the ESPP plan. It is a good choice to buy stocks at a 15% discount and make a profit from it.

4. Why does the company offer the ESPP?

   ESPP is a good strategy to attract employees toward the company by giving them shares of the company at a discounted price. An offering of ESPP can make the company attractive and brings more talent, which will help to grow the company.

5. what is RSU?

The full form of RSU is Restricted Stocks Units. RSU is a limited type of stock. Employer gives RSU ( Restricted Stocks Units) to the employee with shares without any conditions. RSU comes with a vesting term. After 5 years of a vesting term, the company may allocate 10000 shares. The employee will receive these 10000 shares after the vesting period is over.

If you are looking for any Employee stock option plan ESOP services or consultants in Noida, Delhi, Gurgaon or anywhere in India, write to us at accounts@especia.co.in. Or Call On :(+91)-9711021268 +91-9310165114

- Share this post on -

Especia in news