Are there risks to having money in an ESPP if the company fails before the purchase date?

Asked by: Bob Park

Is an employee stock purchase plan worth it?

Are ESPPs good investments? These plans can be great investments if used correctly. Purchasing stock at a discount is certainly a valuable tool for accumulating wealth, but comes with investment risks you should consider. An ESPP plan with a 15% discount effectively yields an immediate 17.6% return on investment.

Is there a holding period for ESPP?

According to the 2017 NASPP Domestic Stock Plan Survey, 22% of qualified ESPPs and 31% of non-qualified ESPPs have a required holding period, often ranging from six months to two years.

What is a disqualifying disposition ESPP?

Disqualifying disposition:

You sold the stock within two years after the offering date or one year or less from the exercise (purchase date). In this case, your employer will report the bargain element as compensation on your Form W-2, so you will have to pay taxes on that amount as ordinary income.

How do you avoid double tax on ESPP?

To avoid double taxation on the $20, you must make an adjustment on Form 8949. The remaining $10 will be taxed as a capital gain. For shares acquired under an employee stock purchase plan, the adjustment depends on how long you hold the stock after purchase.

Should I max out my employee stock purchase plan?

Most people who have access to an Employee Stock Purchase Plan should definitely use it, max it out, and flip it immediately. Doing so will almost guarantee an almost 30% annual return on your money.

How much should you contribute to employee stock purchase plan?

If you haven’t ever contributed to your company’s ESPP before, select a percentage of your pay that feels comfortable (maybe 1-5% of your salary). This will help you get acquainted with how ESPPs work and will give you confidence to increase the percentage later.

How long does it take for ESPP to vest?

Companies will often vest your options over time. This means in the first year; you might own 20%. Then after the second year 50% until you are fully vested at 100%. The schedule depends on the company.