Who can participate in ESPP?

In general, all employees at your company (or its designated subsidiaries or parent company) are eligible to participate in a tax-qualified Section 423 ESPP as long as certain conditions are met. With ESPPs that are not this type, companies have more flexibility in determining who is eligible and who can be excluded.

How does the ESPP work?

An employee stock purchase plan (ESPP) is a company-run program in which participating employees can purchase company stock at a discounted price. At the purchase date, the company uses the employee’s accumulated funds to purchase stock in the company on behalf of the participating employees.

What happens to contributions in an Employee Stock Purchase Plan ESPP when the company is acquired?

Other than the change to the type of shares being purchased, your participation in the ESPP will continue as usual. You will not need to re-enroll in the ESPP, and any authorized payroll deductions to purchase shares under the ESPP will continue after the merger, unless you change or discontinue them.

What are ESPP refunds?

Any cash that’s not used to purchase stock is refunded back to the worker. The shares purchased under the ESPP are deposited there. There’s no tax impact when the shares are purchased and transferred. But there are tax implications when you sell the shares.

How does ESPP lookback work?

A lookback is a provision in certain tax-qualified ESPPs. A lookback provision bases the purchase price not on the stock price at the time of purchase but, rather, on the price either at the beginning of the offering period or at the end of the purchase period, whichever is lower.

Why do companies offer employee stock purchase plans?

Companies offer their employees the opportunity to purchase company stock through ESPPs to let them own shares of the business. ESPPs with a discount on the purchase price provide an attractive investment opportunity and a broad-based employee benefit.

What can you do with ESPP shares?

Most commonly, we see people use the ESPP sale proceeds to create an emergency fund, pay off debt, use toward the downpayment on a mortgage, or simply reinvest in other places. The idea is to use those proceeds from selling ESPP shares immediately to further other important long-term financial goals.

What is ESPP disposition?

Disposition is just another way of saying that you have sold, gifted, or transferred ownership of your shares. • Qualifying dispositions occur when shares are held for the required holding periods — which means they’ll receive a more preferential tax treatment.

How do you report transfer of stock acquired through an employee stock purchase plan?

Your employer will send you Form 3922, Transfer of Stock Acquired Through an Employee Stock Purchase Plan Under Section 423(c), if you purchased ESPP stock during the tax year.

What is lookback provision?

The Taxpayer Certainty and Disaster Tax Relief Act of 2020 has a “lookback” provision that allows you to use your 2019 earned income instead of your 2020 earned income to calculate the Earned Income Credit (EIC) or Additional Child Tax Credit (ACTC) on your 2020 tax return if doing so makes the credit larger.

How do companies benefit from ESPP?

An ESPP is an employer benefit offered at some publicly traded companies that allows employees to purchase shares of their company’s stock at a discount. A typical ESPP program permits employees to enroll for a 12-month offering period.

What happens when you sell ESPP?

You can continue to purchase company stock through your ESPP program and sell your shares immediately to keep taking advantage of your discount; even though you’ll pay more income tax, you’ll reduce your risk of holding too much of a single stock. An accountant or financial planner can help you plan your strategy.