Chapter 37
EMPLOYEE STOCK PURCHASE PLAN
(SECTION 423 PLAN)
LEARNING OBJECTIVES:
A. Have a basic understanding of Employee Stock Purchase Plans
REVIEW:
This chapter briefly discusses Employee Stock Purchase Plans, a benefit
normally used with a broad group of employees rather than a select group of
executives. After looking at advantages and disadvantages, the chapter moves to
ESPP requirements under code section 423. In this section, coverage and
benefits requirements are discussed. The two main tax benefits are then covered
in the tax implications section. Mention is made that ERISA does not apply to
ESPPs. Plan set up is summarized, and the chapter includes a reference to IRS
Pub. 525 to learn more.
CHAPTER OUTLINE:
A.
B.
C.
D.
E.
F.
G.
H.
I.
When Is It Indicated?
Advantages
Disadvantages
ESPP Requirements Under Code Section 423
1. Coverage
2. Benefits
Tax Implications
ERISA And Other Requirements
How Is The Plan Set Up?
Where Can I Find Out More About It?
Chapter Endnotes
1
Chapter 37
FEATURED TOPICS:
Employee Stock Purchase Plans (Section 423 Plans)
CFP® CERTIFICATION EXAMINATION TOPIC:
Topic 32: Stock plans
A. Types and basic provisions
4) Employee Stock Purchase Plan (ESPP)
COMPETENCY:
Upon completion of this chapter, the student should be able to:
1. Have a basic understanding of Employee Stock Purchase Plans
KEY WORDS:
employee stock purchase plan (ESPP), Section 423 plan, ESPP option
DISCUSSION:
1. Discuss the main tax benefits of ESPPs.
2. Discuss ESPP coverage and benefits requirements under code section
423.
QUESTIONS:
1. Which of the following are regulations governing ESPPs?
(1) benefits are limited to $25,000 per year
(2) benefits are forbidden to more than 5% owners
(3) the plan must cover all employees, with few exceptions
(4) the plan may not cover employees of the employer’s parent corporation
a.
b.
c.
d.
(1) only
(1) and (2) only
(1) (2) and (3) only
(2) (3) and (4) only
Chapter 37
Chapter 37, pp. 295
2. Assuming appropriate regulations and requirements are followed, which of
the following correctly identify tax issues related to ESPPs?
(1) gain on the sale of stock is taxed as a capital gain
(2) there is no taxation to the employee until the stock is sold
(3) the employee is taxed when the ESPP option is granted
(4) the employee will be taxed when the ESPP option is exercised
a.
b.
c.
d.
(1) and (2) only
(2) and (3) only
(3) and (4) only
(1) (3) and (4) only
Chapter 37, pp. 295
3. Which one of the following weakens the value of an ESPP as a performance
incentive?
a. the employee is taxed when the stock is sold
b. fluctuation in the market value of the stock is likely to have little or no
relation to employee performance
c. the ESPP is a form of equity compensation
d. all covered employees must have the same rights and benefits
Chapter 37, p. 295
4. Which of the following ERISA requirements must be met by ESPPs?
(1) Form 5500 reporting
(2) participation
(3) funding
(4) vesting
a.
b.
c.
d.
(1) and (2) only
(3) and (4) only
all of the above
none of the above
Chapter 37, p. 296
Chapter 37
ANSWERS:
1. c
2. a
3. b
4. d