There is a lot of information that you need to know if you want to introduce an employee stock purchase plan in your business. It is vital that you know how these plans work and the different types. You also need to know what the benefits are of having an employee stock purchase plan.
What Is An ESPP?
An ESPP or employee stock purchase plan is a program that allows employees to purchase stock options for the business they work in. The structure of this plan will vary depending on the company and what you choose. It is important that the plan is fully outlined before being offered to employees.
If an employee is eligible for stock options, they will be given a chance to participate in the ESPP: They will need to make a contribution to buy the company stocks at the price set out in the plan documents. The contribution will be after-tax, but it is possible to offer up to 15% discount for these plans.
The Types Of ESPP
There are two types or ESPP that you can use being quailed and nonqualified. The qualified status of the plan will relate to tax. A tax-qualified plan can offer employees many tax benefits that you need to consider.
Qualified ESPPs will need formal approval from the shareholders. If the shares are offered at a discount, the employee will not be taxed on the difference. If you are thinking of a qualified ESPP, you will need to talk to a tax consultant first.
Nonqualified plans will have fewer restriction compared to the qualified option. However, this freedom comes at the expense of the tax benefits. This means that employees will be taxed on the discount they receive when buying their stock. This taxation could be between 15% and 35% of the value of the discount.
The Benefits Of An ESPP
If you are unsure about whether you should offer an employee stock purchase plan, you need to consider some of the benefits. The primary benefit is that you will align the interests of your employees with the interests of the business. When your employees have stock options in the business, they will have a vested interest in the company doing well and this can encourage them to contribute more.
Another benefit is that you will encourage employee savings. As the stocks in these plans are generally offered at a discount, you will save them money while offering an investment. Stock options can be a future investment for your employees that do not cost them more than they can afford.
ESPPs can also be used as a means of rewarding employees. While an employee can leave once they have the shares, you can use the plan as an incentive for loyalty. Offering the plan to employees after a number of years with the company is a good way to reduce employee turnover.
There is a lot of information you need to know about employee stock purchase plans. It is recommended that you talk with a financial advisor regarding this as a plan will have to be laid out before the program is live. You also need to ensure that this is the right option for your business.