Benefits of Employee Stock Purchase Plans

Whether you are a business owner, CEO, or manager, you need to find ways to keep employees satisfied, fulfilled and productive, as well as ensuring they want to stay with the company. A good way to make sure that employees are happy with the company is to provide employee benefits, such as the employee stock purchase plans, or ESPP. An employee stock purchase plan allows employees to buy stock options during a prescribed period, sometimes at a discount.

A company can offer workers a qualified or a non-qualified employee stock purchase plan. Qualified plans are considered more beneficial to workers because it offers preferred tax treatment while non-qualified plans do not.

A good benefit of an employee stock purchase plan is that it is a good way to involve employees in the company ownership, which motivates them into being more productive and staying with the company for a long period. This is because employees would not only work for the company, they are working for themselves.

Also, corporate success will likely happen with a competitive workforce. As an employee owns part of the company, they would definitely want to witness the company to succeed. If they see the company succeed, they would see themselves succeed. For example, if a company will fail in operations leading to losses, its stock price will also decrease, hence employees might suffer a loss when they choose to sell their stock. On the other hand, if the company succeeds, the stock price soars and the employees would earn a profit when they sell their shares.

Another big advantage is that more money is put back into the company as employees continue to buy stock options instead of management giving employees stock. As they purchase stock options, employees are investing into the company thereby increasing equity.

Likewise, employees will always have good investment returns. As employees purchase stock options at a discount, they would make a profit by selling their options. Another good benefit are tax breaks because the employee stock purchase plan is covered under Section 423 of the IRS code, wherein the stocks are not taxed at the time of the purchase. Employees are only taxed when they sell their stocks. Also, if the employee maintains the stock for the required holding period, part of the profit may be taxed as ordinary income or capital gains. For non-qualified plans, the difference of price of stock paid by the employee and the fair market value is considered ordinary income and would be taxed at purchase.

A good benefit of an employee stock purchase plan is that employees gain a savings plan. With this, employees can choose to invest 1-15% of after-tax wages, but not exceeding $25,000 worth of stock options in one calendar year. Because the investment is considered a payroll deduction, employees need not worry about allotting money for a savings plan.

Such plans are an additional benefit for the company. But the qualified plans are more lucrative than the non-qualified plans.

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