Author Topic: Employee Stock Plan Evaluation  (Read 1968 times)

ooeei

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Employee Stock Plan Evaluation
« on: August 01, 2016, 02:07:15 PM »
Hey all, just want to get some input if there's anything I might be missing with the stock purchase plan my employer is rolling out soon. 

  • Contribute up to 10% of salary (~$3500 for 6 months for me)
  • Contributions are in blocks of 6 months during which you can only decrease or cancel contributions (no increase)
  • At end of 6 months, your contributions are used to purchase company stock at 10% discount of whichever is lower of the 1st or last day of the 6 months. Discount is treated as taxable income (25% rate for me).
  • Shares can be sold as soon as they are purchased (not counting the few days it will probably take to process)
  • Fees for selling are: $5.35+ .03/share (shares should be worth $5-10 if I had to guess) or $29.95, whichever is higher.  For me the $29.95 will be higher unless I get a pretty hefty raise soon or the stock drops hard.

The way I see it, even in a worst case scenario where the stock is purchased at the price at the end of the 6 months, I'm making $350*.75-$29.95=$232.55 twice a year.  Capital gains tax should be minimal as I'll sell right away (unless the stock has increased over the 6 months and the purchase price is based on the first day, which I'm of course just fine with).  There is the possibility the stock could tank in the few days it takes to process the sale, but there's also the possibility the stock will be up compared to the beginning of the 6 months, and I'll get it at more than a 10% discount.  If the stock does tank hard after the purchase date, I'd be bummed, but not going to the poor house by any means.  This is an energy company, so the potential for crashes is there, but I'm comfortable with that risk.

Anything else I should be looking out for here?  I'm seeing an almost guaranteed (except those few processing days) 13.2% annual return, with a pretty good shot at getting more if the stock generally goes up.

Spitfire

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Re: Employee Stock Plan Evaluation
« Reply #1 on: August 01, 2016, 02:15:57 PM »
I have the same thing at my company, except we get a 15% discount instead of 10%. Mine also allows me to transfer the stock into my brokerage so I pay my normal trade fee instead of their $25 fee. To me, it's free profit/guaranteed return like you are thinking. It's really awesome when the stock goes up and you get to buy at a discount off the lower starting price. 

I think you do have an error in your math and that your return is 6.6%, perhaps you were doubling your profit to get an annual amount without doubling your investment? Still, it's free money!

ooeei

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Re: Employee Stock Plan Evaluation
« Reply #2 on: August 01, 2016, 02:29:07 PM »
I have the same thing at my company, except we get a 15% discount instead of 10%. Mine also allows me to transfer the stock into my brokerage so I pay my normal trade fee instead of their $25 fee. To me, it's free profit/guaranteed return like you are thinking. It's really awesome when the stock goes up and you get to buy at a discount off the lower starting price. 

I think you do have an error in your math and that your return is 6.6%, perhaps you were doubling your profit to get an annual amount without doubling your investment? Still, it's free money!

Yeah, it's a 6.6% return, twice a year.  I'm assuming at any given point I have a max of $3500 tied up in the investment, and I'm making $465.10 over the year.  I'm sure there's a more sophisticated way to calculate it, but that's close enough for me and seems to make sense. 

There was something about transferring to a brokerage, didn't look to see if that has an associated fee.  It might be worth transferring over before selling.

seattlecyclone

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Re: Employee Stock Plan Evaluation
« Reply #3 on: August 01, 2016, 02:31:24 PM »
I think the way you're looking at it is exactly correct. The usual warnings against holding your employer's stock only apply if you intend to hold on to the stock for more than the amount of time it takes to sell it, which you do not.

MichaelB

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Re: Employee Stock Plan Evaluation
« Reply #4 on: August 01, 2016, 02:53:06 PM »
  • At end of 6 months, your contributions are used to purchase company stock at 10% discount of whichever is lower of the 1st or last day of the 6 months. Discount is treated as taxable income (25% rate for me).

Doesn't this essentially double your tax liability? You get taxed on the discount (25% income), and then when you immediately sell it, you get taxed on the short term capital gain (25% again), which would essentially equal the discount. Am I understanding this correctly? It seems like half your gain would get eaten by the gov't.

ooeei

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Re: Employee Stock Plan Evaluation
« Reply #5 on: August 01, 2016, 03:01:38 PM »
  • At end of 6 months, your contributions are used to purchase company stock at 10% discount of whichever is lower of the 1st or last day of the 6 months. Discount is treated as taxable income (25% rate for me).

Doesn't this essentially double your tax liability? You get taxed on the discount (25% income), and then when you immediately sell it, you get taxed on the short term capital gain (25% again), which would essentially equal the discount. Am I understanding this correctly? It seems like half your gain would get eaten by the gov't.

That's how I calculated it at first too, but I don't think that's how it works.  As I understand it, you are taxed on the 10% discount as income.  That discount does not then also count as capital gains. 

For example:  Stock is purchased based on a $10 share price 6 months ago for $9.  Now the Stock is worth $12.  I pay 25% income tax on the $1 discount I got on the original price, then I pay 25% capital gains tax on the $2 difference between the price that I bought and the price that I sold.  Essentially any gain I get is taxed as ordinary income, but nothing is taxed twice.  In this example I end up paying 25% of $3, which is the overall amount I made on the sale. 


Spitfire

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Re: Employee Stock Plan Evaluation
« Reply #6 on: August 01, 2016, 03:03:36 PM »
  • At end of 6 months, your contributions are used to purchase company stock at 10% discount of whichever is lower of the 1st or last day of the 6 months. Discount is treated as taxable income (25% rate for me).

Doesn't this essentially double your tax liability? You get taxed on the discount (25% income), and then when you immediately sell it, you get taxed on the short term capital gain (25% again), which would essentially equal the discount. Am I understanding this correctly? It seems like half your gain would get eaten by the gov't.

If he is taxed immediately on it, it should add to his tax basis in the stock so the sale would have no gain/loss (assuming the price doesn't move).

My company doesn't tax me, so I do get the short-term capital gain treatment when I sell it.

MoonLiteNite

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Re: Employee Stock Plan Evaluation
« Reply #7 on: August 04, 2016, 03:02:32 AM »
You are seeing it right, it are very dang hard to lose money on an ESPP if you use an auto sell on market open after your buyin.

I have been employed at my current place for 3 years. I been just holding my shares since my company had had a shotty 5 year run. But still collecting my 1.2% dividend rate.
Finally stocks are up 20% and i have more than doubled my averaged out buyins. Going to sell in the next few weeks for a 60% profit or so :)

After that, i think will will use auto sell since i believe my company stock will level out  from here.

I am really confused why some FI and advisers and radio folks dislike ESPP. That bald christian dude seems to hate them. I have no clue why!
« Last Edit: August 04, 2016, 03:05:41 AM by MoonLiteNite »