One special feature of an employee stock purchase

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One special feature of an employee stock purchase plan is that this plan must have broad participation. This means that the employer cannot offer the plan to only the HCE population. Every employee must be included that has at least 2 years of full-time service to the company (except those who own more than 5% of the company). The idea is that the executives might be offered stock options, while everyone else has access to an ESPP to provide incentives for employees of all income ranges. Employee stock purchase plans have what is called an offering period , which is simply the window of time in which the employee can purchase shares at the stated percentage discount. The percentage discount could be based upon the price at the beginning of the offering period or at the end of the offering period. It is not a situation where the employee gets to pick any day in between. Some companies will apply the look back rule , which states that employees can retroactively choose whether they want the price at the beginning of the offering period or the ending price. If this extra benefit is applied, then the offering period is limited to 27 months. Functionally, an employee who chooses to participate in an ESPP will have money withheld from their after-tax pay to purchase shares of the company at a discount. This gives all employees a tremendous incentive to purchase shares and therefore have a vested interest in how the company performs. If an employee holds the stock for at least 2 years from the beginning of the offering period and at least 1 year after the shares are purchased, then the employee will receive special tax treatment. The dollar discount received will be taxed as ordinary income, while any subsequent growth (or loss) in value is a capital gains issue. Consider an employee whose employer has a publicly traded stock currently priced at $10 per share. If the company offers a 15% discount, then the employer will withhold money from the employee’s after- tax paycheck and use the money to purchase shares at $8.50. This is all after-tax so there are no complex tax rules to understand. The employee simply will have a capital gain (or loss) whenever they should choose to sell. If this employee, who purchased shares at $8.50, sold their shares immediately, then they would realize a 17.6% ([$10 - $8.5] / $8.5) instant return! Note that a 15% discount will produce an immediate benefit greater than 15%. In this case, the investor would pay taxes at the higher short-term capital gains rate (which is the same rate as ordinary income), but at least they locked in a profit… Phantom Stock Another way to structure employee stock ownership without forcing employees to pay out-of-pocket is called phantom stock. Phantom stock is nothing more than a unit of ownership which is tied to the movement of the company’s actual stock. The phantom stock units will have a fixed term (maturity period). Employees will receive a payout based on the appreciation in the units, which is actually the
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appreciation in the underlying stock. The employer establishes, in advance, when the phantom stock is
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  • Spring '14
  • VOSS,JAMESA
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