Employee Stock Purchase
Plan (Section 423 Plan)
Chapter 37
Employee Benefit & Retirement Planning
What is it?
A plan for compensating a broad group of employees
with options to buy stock of the employer company at a
specified price
– generally not used for executive compensation
– limited to $25,000 / year
– forbidden to more than 5% owners
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Employee Stock Purchase
Plan (Section 423 Plan)
Chapter 37
Employee Benefit & Retirement Planning
When is it Indicated?
1.
2.
Employer willing to compensate employees with
shares of company stock
Employer wishes to reward executive performance
with equity based compensation
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Employee Stock Purchase
Plan (Section 423 Plan)
Chapter 37
Employee Benefit & Retirement Planning
Advantages
1.
2.
3.
4.
provides incentive
easy form of savings
little to no out-of-pocket cost to company
tax deferred to employee
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Employee Stock Purchase
Plan (Section 423 Plan)
Chapter 37
Employee Benefit & Retirement Planning
ESPP Requirements Under Code Section 423
Coverage: Plan must cover all employees, but may
exclude those
– with < 2 yrs. Service
– with customary service < 20 hrs. / week or not more than
5 months in any calendar year
– who are highly compensated
Copyright 2009, The National Underwriter Company
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Employee Stock Purchase
Plan (Section 423 Plan)
Chapter 37
Employee Benefit & Retirement Planning
ESPP Requirements Under Code Section 423
Benefits:
– same rights and benefits to all covered employees, but
amount of stock can be % of compensation
– cannot purchase > $25,000 of stock under ESPP in any
one calendar year
– stock price must not be less than LESSER
•
•
85% of fair market value at time option granted
85% of fair market value at time stock purchased
– options generally must be exercised within 5 yrs.
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Employee Stock Purchase
Plan (Section 423 Plan)
Chapter 37
Employee Benefit & Retirement Planning
Tax Implications
1. If employee meets certain criteria, no taxable income
to employee when ESPP option is
– granted
– exercised
2. if holding period met when employee sells stock,
taxable income consists of
– ordinary compensation income
– capital gain
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Employee Stock Purchase
Plan (Section 423 Plan)
Chapter 37
Employee Benefit & Retirement Planning
Tax Implications
3. if employee meets holding period requirements,
employer receives NO tax deduction
if employee DOES NOT meet holding period
requirements, amount included in employee
compensation income is amount employer CAN
deduct
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Employee Stock Purchase
Plan (Section 423 Plan)
Chapter 37
Employee Benefit & Retirement Planning
ERISA and Other Requirements
ESPP is not a pension or welfare benefit under ERISA
No reporting requirement
Other ERISA provisions also not applicable
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Employee Stock Purchase
Plan (Section 423 Plan)
Chapter 37
Employee Benefit & Retirement Planning
How is the plan set up?
• Plan must be approved by stockholders of granting
corporation within 12 months before or after the date
the employer adopts the plan
• A written plan and notification of employees are wise,
but not mandated by law
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Employee Stock Purchase
Plan (Section 423 Plan)
Chapter 37
Employee Benefit & Retirement Planning
True or False?
1. ESPP benefits are forbidden to more than 5%
owners.
2. ESPPs are used by closely-held corporations.
3. ESPPs have little to no out-of-pocket costs.
4. The employer bears the market risk of an ESPP.
5. ESPP options must be exercised within 10 years.
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Employee Stock Purchase
Plan (Section 423 Plan)
Chapter 37
Employee Benefit & Retirement Planning
Discussion Question
Zeta Corp. granted Norman an option under its
employee stock purchase plan to buy 100 shares of
Zeta for $20 per share when the stock was valued at
$22 / share. A year and a half later, when the stock was
$23 / share, Norman exercised his option; 14 months
later he sold his stock for $30 / share
a. What must Norman report as wages?
b. What must Norman report as capital gains?
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