Author Topic: How to handle: Employee Stock Purchase Plan  (Read 14996 times)

cbr shadow

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How to handle: Employee Stock Purchase Plan
« on: January 02, 2013, 12:38:11 PM »
My employer offers a stock purchase plan as a benefit.  It seems like none of my coworkers take advantage of it, but it's free money so I dont see why they wouldn't.
I can put up to 10% of my paycheck into it, and they'll match 20% of whatever I put in.  This all goes to ESCO shares (ESE) and are purchased on the 10th of every month.  We are allowed to sell up to 4 times per year.

My question is, should I sell my shares regularly?  What should I watch for to plan selling?

I purchased the full amount last year and ended up putting about $5,000 of my own money into it, then selling at the end of the year for $10,000.  That's the company match plus I got lucky in that a lot of shares were purchased when the price was low ($24) then sold when the price was back at $36 where it stays near most of the time.

Are there any type of indicators that I should watch for, or generally is this just a guessing game on when to sell?

gmaxwell

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Re: How to handle: Employee Stock Purchase Plan
« Reply #1 on: January 02, 2013, 12:55:42 PM »
Are there any type of indicators that I should watch for, or generally is this just a guessing game on when to sell?
I participated in an ESPP program with my employer for the past decade and was happy with the results.  The program I had access to allowed me to put in 10% of my regular pay (not commissions or bonuses, unfortunately) and purchased the shares at the most favorable out of the price at the start of the six month offering periods or 15% below the price on the purchase date, so roughly similar but less attractive than yours. Once purchased the shares were placed in an etrade account and I could sell them at any time. Similar to you, few of my immediate coworkers participated, and like you my response was along the lines of "wtf, free money!".

For my first several years I held onto the shares in order to get the more favorable tax treatment, but then I realized that I was violating the principle that causes me to generally not hold stock in the company I work for (risk from lost diversification— if the company implodes I'd lose my job _and_ the value of the stock, plus I generally don't invest in single companies even when I don't work for them) and started selling right away.  Besides— it's income, so I shouldn't mind paying income tax on the full amount.  In retrospect, this turned out to be a good idea as in subsequent years the share prices were far more volatile and I would have taken a bath had I been holding for favorable tax treatment.

Beyond this risk of encouraging you to hold stock you wouldn't otherwise hold, the other risk is that even under a sell-right-away model the market may move on you and cause you to lose money but with the large match that would be unlikely (though I suppose it depends on the company).

I think this kind of program can be a good deal so long as you don't allow them to emotionally impact you and cause you to make bad decisions.
« Last Edit: January 02, 2013, 12:59:14 PM by gmaxwell »

BlueBeard

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Re: How to handle: Employee Stock Purchase Plan
« Reply #2 on: January 02, 2013, 12:58:16 PM »
If your intention is just to get some extra income, sell as soon as you can.  No need to tie up that money for more time than needed.
If you are wanting to make company stock part of your long-term investment allocation then you may get some tax benefits of holding for a longer period.

bdub

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Re: How to handle: Employee Stock Purchase Plan
« Reply #3 on: January 02, 2013, 04:57:13 PM »
My employers program is similar to gmaxwell's (15% discount) except we can lock in the lowest price for up to 2.5 years!  In my 12 years with my employer, there have been a 5 or 6 6-month periods where we were buying at $3.80/share and selling at ~$20, buying $4 and selling at ~$18 and one where we were buying at $8/share and selling at $35.  Sometimes it is good to work for a company with a volatile stock!

I have always sold as soon as the shares were deposited for an almost guaranteed 17.6% return.  I say 'almost' because the shares don't appear in our account for a day or two (I am waiting right now for your 2nd 2012 allotment!)

Over my 12 years with the company, I am averaging about a 45% return on the program.  Since I can put up to 10% of all my salary in, it is like a 4.5% raise.

Unlike other posters, the vast majority of my co-workers are enrolled in the plan (at least the engineers and managers I am around).

Khan

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Re: How to handle: Employee Stock Purchase Plan
« Reply #4 on: January 09, 2013, 09:02:37 PM »
ESE pays a paltry dividend(.8%) and is currently near the 52 week high. As one of the others pointed out, risk diversification is a big reason to not be in on the same stock as you draw employee compensation for. There's also the fact that as long as you're getting the maximum profit off of it from the employer(the 20% match), there's absolutely nothing wrong with locking in profits at whatever rate that is with the employer match and whatever their buying rules are. There's nothing wrong with locking in gains at rates that match Warren Buffetts.

For myself, I work at Intel(I'm a manufacturing technician), and so for me the choice is harder. With my dividend yield, the mastery of the executives at doing good things by shareholders, and the current price of the stock, I am holding my shares for the next year or two. After that however, I do plan on diversifying my risk outside of my company and selling most of my shares, but as I said, my situation and yours are different from fundamental stock aspects.

gooki

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Re: How to handle: Employee Stock Purchase Plan
« Reply #5 on: January 10, 2013, 12:48:00 AM »
Ultimately it comes down to - can you afford the risk? If you can't sell and diversify.

I had to deal with fluctuating currencies as well as stocks and simply adopted a sell when I needed the money policy. At one stage the value of stocks matched the remainder of our mortgage, so I progressively sold them down over a couple of months.
« Last Edit: January 10, 2013, 12:52:48 AM by gooki »

dragoncar

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Re: How to handle: Employee Stock Purchase Plan
« Reply #6 on: January 10, 2013, 06:53:56 AM »
Ultimately it comes down to - can you afford the risk? If you can't sell and diversify.

Yep, where does this fit into you overall asset allocation?  Some guidelines say to keep any one stock to less than 10% of your portfolio, so you could sell to meet that. 

Practically, though, this also comes down to how the company is doing.  Every company I've ever worked for had a higher stock price when I left than when I started.  I attribute this to the fact that they hired me BECAUSE they saw growth ahead.  Also I'm awesome.

spi

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Re: How to handle: Employee Stock Purchase Plan
« Reply #7 on: January 12, 2013, 08:36:35 PM »
One thing to be aware of is that most employee purchase plans have a holding period that if you sell the stock before the period ends you have to count the discount as income instead of a capital gain. So if you think the stock will appreciate you will get the most benefit by holding the stock for the holding period(two years according to Wikipedia). See http://www.irs.gov/publications/p525/ar02.html and the "Statutory Stock Options" section.

nawhite

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Re: How to handle: Employee Stock Purchase Plan
« Reply #8 on: October 21, 2013, 02:19:19 PM »
Where does an ESPP fit in to the list of things to invest your savings in?

Generally the wisdom (which I'm not 100% on board with) is:

1. traditional 401k up to employer match max
2. ROTH IRA up to max ($5500)
3. 401k to the max (17000)
4. Taxable accounts

I just got offered an ESPP with a new job. It is of the fairly standard variety (15% off the lowest price between the start of the 6 months or the end of the 6 months). I can contribute up to 20% of my after tax income to this. Even in the worst case where the stock is worth less now than 6 months ago, this is worth about the same as the 401k matching my company does. I'd sell immediately (or within the week or so it takes them to deposit it in my account).

Ideally I'd like to put the 23,500 towards 401k and IRA and then still be able to put 20% towards this ESPP but I'm not sure I can do all of that. Which should I prioritize?

aclarridge

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Re: How to handle: Employee Stock Purchase Plan
« Reply #9 on: October 21, 2013, 03:04:17 PM »
Interesting dilemma!

I think it would depend on your tax bracket and your expectation for the value of the stock (you could get fancy here with expected lowest point reached under some stochastic process' dynamics, but probably simpler to just say it'll go up at some %age and the current price is the lowest price it'll be over the next 6 months).

If I were you I'd calculate 2 scenarios, putting it at the top of your list vs. at the bottom. It may be clear at that point that it doesn't matter much where you put it, or you may want to try other spots to fit it in in that list to maximize your expected outcome. I can't see a clear-cut answer without some more information.

I would say the safest thing you can do is put it at the bottom of the list, since your other investments are probably more diversified.

msilenus

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Re: How to handle: Employee Stock Purchase Plan
« Reply #10 on: October 21, 2013, 03:27:11 PM »
Just to be really explicit about this:

The discount you get on ESPP purchases becomes *tax free* after 2 years.  So there are three basic inflection points:
1) The day you get the stock.  You might sell at this point for diversification purposes.  You're trading favorable tax treatment for reduced risk.
2) After 1 year.  Any change in value at this point is now long-term capital gains, and you've deferred taxes on the rest for one year.
3) After 2 years.  As above, but you also get your initial X% discount exempted from taxes.
(I don't think holding indefinitely is a defensible play.)

If you think your employers business might be falling in value, you might be more inclined to sell right away.  If the ratio of 2-years worth of purchases to your entire liquid net worth isn't very high (because you've been at this for a while), then you might not need to worry about the diversification risk as much.  If your tax bracket is high, that might nudge you toward holding for two years, and if it's low, then you might not worry about selling right away.

It's situational.  But I do think that you shouldn't worry too much about timing the market.  Just pick a strategy according to your risk and diversification needs, and execute on it.  Even if you're selling down, you're going to move that money into something else quickly enough.  The trade doesn't need to be profitable to serve its purpose.

Your coworkers are nuts, though.

nawhite

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Re: How to handle: Employee Stock Purchase Plan
« Reply #11 on: October 21, 2013, 04:11:15 PM »
Just to be really explicit about this:

The discount you get on ESPP purchases becomes *tax free* after 2 years.  So there are three basic inflection points:
1) The day you get the stock.  You might sell at this point for diversification purposes.  You're trading favorable tax treatment for reduced risk.
2) After 1 year.  Any change in value at this point is now long-term capital gains, and you've deferred taxes on the rest for one year.
3) After 2 years.  As above, but you also get your initial X% discount exempted from taxes.
(I don't think holding indefinitely is a defensible play.)

I'd be going with option #1 because it would be a large portion of my net worth and I don't feel comfortable keeping it in company stock. But at the same time, in the grand scheme of things, the total taxes I'd be saving seem not worth it for having it tied up for 2 years.

Lets say I make 100k/year and am in the 25% tax bracket because I file with my wife. I put 20k/year towards this. If the stock is worth less now than 6 months ago, that 20k buys me $23500 after the discount. If I cash out immediately, I pay 3500 *.25 = $875 in taxes and lock in 2625 in profit. The problem is that I need to leave the entire $23500 invested for the 2 years to not pay taxes on it. So if the stock goes down by 3.8% by the time I sell 2 years later, I lose more than I paid in taxes in the cash out immediately situation ($23500 * 0.038 > $875)

So by cashing out and paying the taxes I am effectively saying that I don't trust the stock not to go down by 3.8% in the next 2 years. Sure a bet is a bet, but in this case its not worth it to me to hang onto the stock.

@FI40: I was looking for guidance b/c my specifics will be hard even to figure out on Excel because I need to also figure out where "pay down mortgage to make PMI go away" and "6.8% student loans" fit in. Maybe that deserves its own thread as a Reader Case Study? haha

aclarridge

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Re: How to handle: Employee Stock Purchase Plan
« Reply #12 on: October 23, 2013, 06:00:09 AM »
Just to be really explicit about this:

The discount you get on ESPP purchases becomes *tax free* after 2 years.  So there are three basic inflection points:
1) The day you get the stock.  You might sell at this point for diversification purposes.  You're trading favorable tax treatment for reduced risk.
2) After 1 year.  Any change in value at this point is now long-term capital gains, and you've deferred taxes on the rest for one year.
3) After 2 years.  As above, but you also get your initial X% discount exempted from taxes.
(I don't think holding indefinitely is a defensible play.)

I'd be going with option #1 because it would be a large portion of my net worth and I don't feel comfortable keeping it in company stock. But at the same time, in the grand scheme of things, the total taxes I'd be saving seem not worth it for having it tied up for 2 years.

Lets say I make 100k/year and am in the 25% tax bracket because I file with my wife. I put 20k/year towards this. If the stock is worth less now than 6 months ago, that 20k buys me $23500 after the discount. If I cash out immediately, I pay 3500 *.25 = $875 in taxes and lock in 2625 in profit. The problem is that I need to leave the entire $23500 invested for the 2 years to not pay taxes on it. So if the stock goes down by 3.8% by the time I sell 2 years later, I lose more than I paid in taxes in the cash out immediately situation ($23500 * 0.038 > $875)

So by cashing out and paying the taxes I am effectively saying that I don't trust the stock not to go down by 3.8% in the next 2 years. Sure a bet is a bet, but in this case its not worth it to me to hang onto the stock.

@FI40: I was looking for guidance b/c my specifics will be hard even to figure out on Excel because I need to also figure out where "pay down mortgage to make PMI go away" and "6.8% student loans" fit in. Maybe that deserves its own thread as a Reader Case Study? haha

Heh, yeah sure you could try it! You'd have to make a lot of information known but some people might have the time to do a thorough analysis. In these situations (and I haven't faced one as complicated as yours in my own life yet) I try to just think of the likely optimal scenarios, and do my best to determine a relevant number for each scenario (say, net worth in 2 years or something) so I can compare them easily. Unfortunately, this method often requires big assumptions to be made about expected returns, interest rate forecasts, FX forecasts, house price forecasts, the standard deviations of all these things, etc. etc. But at least when you're done you have a clear answer - under the best assumptions I can make at this time, this is my best option, so I'll go with it.

Cromacster

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Re: How to handle: Employee Stock Purchase Plan
« Reply #13 on: October 23, 2013, 06:33:04 AM »
My company offers something similar, though they don't match anything.  They do cover any fees associated with the purchase/selling of shares.  So that is nice.  So far I have contributed very little through this method.

One annoying thing they do is how they match the 401(k).  Half of the company match goes into whatever I elect, the other half goes into company stock (public company).  While, historically the company has performed very well, it kinda irks me that they do this.

Khan

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Re: How to handle: Employee Stock Purchase Plan
« Reply #14 on: October 23, 2013, 06:39:07 AM »
My company offers something similar, though they don't match anything.  They do cover any fees associated with the purchase/selling of shares.  So that is nice.  So far I have contributed very little through this method.

One annoying thing they do is how they match the 401(k).  Half of the company match goes into whatever I elect, the other half goes into company stock (public company).  While, historically the company has performed very well, it kinda irks me that they do this.

Hey, it's free money ;)
My company has kind've the same problem with the 401k. They do not do matching, instead they provide cash bonuses to the 401k at the beginning of the year. That's not the problem though, they also after ~2 years begin "retirement" contributions, which are vesting units that are locked into a -not the greatest- fund. It's not bad, just not what I'd choose.

Cromacster

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Re: How to handle: Employee Stock Purchase Plan
« Reply #15 on: October 23, 2013, 06:43:38 AM »
My company offers something similar, though they don't match anything.  They do cover any fees associated with the purchase/selling of shares.  So that is nice.  So far I have contributed very little through this method.

One annoying thing they do is how they match the 401(k).  Half of the company match goes into whatever I elect, the other half goes into company stock (public company).  While, historically the company has performed very well, it kinda irks me that they do this.

Hey, it's free money ;)
My company has kind've the same problem with the 401k. They do not do matching, instead they provide cash bonuses to the 401k at the beginning of the year. That's not the problem though, they also after ~2 years begin "retirement" contributions, which are vesting units that are locked into a -not the greatest- fund. It's not bad, just not what I'd choose.

Yea, you're right, it is free money.  I sell most of the company stock in the 401(k) as soon as I get it, but it is just an extra step for me.

Yea, my wife's company contributes to her 401(k) in a similar manner, except its based on company performance.  So if they have a bad year, they get very little contributed.  Though the last two years she received 9% and 10% of her salary.  So that's awesome.

tooqk4u22

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Re: How to handle: Employee Stock Purchase Plan
« Reply #16 on: October 23, 2013, 11:14:38 AM »
The reality is that you or anyone else shouldn't be in a position that 10% of your income being invested would hurt you.  So you are getting a 20% risk free return each time you invest and if you hold then that gives you a 20% buffer.  Taxes really don't matter much in this. 

The only thing that matters is the strength/stability of the company - stock certainly has a downward trend with a volatile trading range. But even then, if you can sell four times and do so quarterly that will minimize potential damages.

jcandoitbig

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Re: How to handle: Employee Stock Purchase Plan
« Reply #17 on: October 25, 2013, 04:50:34 PM »
Do you believe in your company? Is there a potential for a stock split in the future? If yes to both, then I would keep the shares....

ichangedmyname

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Re: How to handle: Employee Stock Purchase Plan
« Reply #18 on: October 27, 2013, 06:45:25 PM »
Sorry to butt in. First off thanks for starting this topic.

Is it still a good idea to do ESPP if you have to hold the stocks for at least a year before you can sell?

pom

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Re: How to handle: Employee Stock Purchase Plan
« Reply #19 on: October 28, 2013, 04:46:26 AM »
The reality is that you or anyone else shouldn't be in a position that 10% of your income being invested would hurt you. 

I totally agree with that, you should be investing such a high enough portion of your income that even in the worst case of losing 10%, it should only set you back a few months.

When I worked for a company that had one, I used to do the max (10%), hold it for 2 years then sell systematically. So at most I would have lost 20%of pay (a loss that would have been deductible eventually using the 3k rule). I was also relatively certain that I could get another job quickly if the company went down in flames.

As I was saving about 40% of pay at the time, here is more or less how I analysed it:
Worst case: lose 20% of pay which is a set-back of 6 months one shot
Average case: pocket the discount worth 2% of pay which is a saving of 1/2 month per year
Best case: sky is the limit but lets assume it is +100% so I save 6 1/2 months one shot

I didn't try to second guess the market, I assumed that it priced the company more or less correctly.