Employee Stock Purchase Plan
What is an employee stock purchase plan?An employee stock purchase plan is in the United States a way for employees of corporations to purchase the corporation’s that they work for stock, in a tax-efficient way and most times at a discount. Employees are able to add contributions via payroll deductions that accumulate during the time period between the dates of the offering and the purchase date. When the purchase date comes the employee’s accumulated payroll deductions are used to buy shares by the company for those employees who have chosen to participate. Each plan is different and has different specifics, therefore possibly a different percentage off the market price. There are also different taxing implications that are depending on if the sale if the stock by the employee is considered qualified or non-qualified. For the sale to be a qualified sale or disposition the stock can be sold two years after the date of offering and at least one year must have passed from the purchase date. If the sale of the stock occurs during the two years after the offering date or within one year after the date of purchase then the sale would be non-qualified.
Can stock purchased through an employee stock purchase plan be rolled over into an IRA?Stocks that are already owned by an individual are not eligible into an IRA unless the rollover occurs from a qualified plan. An employee stock purchase plan is not a plan that is qualified to rollover into an IRA. If an individual wants to get the money from the stock purchased through their employee stock purchase plan the individual would need to sell the stock that they acquire through the employee stock purchase plan and put the proceeds into the IRA. If the individual does sell the stock and puts the proceeds into an IRA, the sale would be taxable and could end up a deduction for the IRA contribution.
How do employee stock purchase plans effect an individual’s taxes?The employee who has an employee stock purchase plan would report no income from the plan until the stock has been sold. Then when the employee has sold the stock it will depend on when the employee sold the stock. If the employee has met the holding period which is a minimum of two years after the stock offering date and a minimum of one year from the date the stock was purchased then the employee would report a long term gain, as long as the stock was not purchased below the market value of the stock at the time, when the offering was made. If the stock purchased through the employee stock purchase plan was bought below the market value of the stock, then the amount that was discounted would be reported as ordinary income and the additional gain would be long term capital gain.
How are taxes affected if an individual has an employee stock purchase plan and the employer also contributes to the plan on the employees behalf?If an employee has made contributions to an employee stock purchase plan and the contributions were made from post-tax monies and the contributions made by the employer were included in the employee’s taxable income, then the employees cost basis for the stock would be the total of all the contributions made by the employee and the employer. The reasoning behind this is that a company (employer) is not able to just give funds to an employee without the funds being declared either as a loan or as compensation that is unless the company does it through a qualified tax-deferred plan.
An employee stock purchase plan is benefit that some employers offer to their employees, in which payroll deductions are made and accumulated to purchase the company’s stock when it is offered. The offering of stock is often at a discounted rate, for example 10% off the fair market price of the stock. How an individual is taxed on the sale of their stock will depend upon if the sale was a qualified or non-qualified disposition. Stocks can be hard to understand, and if an individual needs clarification they should always ask an Expert.