Any downsides to employee stock purchase plans?

Submitted by stuchainz92 t3_yikr03 in personalfinance

I have been with my current employer for about six months and they recently opened up our employee stock purchase plan enrollment. We can choose between $15-300 per paycheck to purchase company stock at a discount at the end of the period.

Without saying the company, are there downsides to enrolling besides the obvious subtraction to my paycheck? Was thinking about doing $50 a paycheck or so. It will be managed by fidelity away from my actual retirement but that’s fine with me.

Appreciate any responses!

1

Comments

You must log in or register to comment.

alexm2816 t1_iuj4o7h wrote

If you can buy and sell immediately then there is no downside and you should max it out as it's free money.

If you're required to hold for some period or there are strings then it depends on what those strings are.

8

stuchainz92 OP t1_iuj4vzo wrote

Not seeing a holding requirement, just that there are tax implications to selling! It sounds like I can enroll then just sell via Fidelity when the purchase goes through in February. Nice!

1

Dorkus_Mallorkus t1_iuj5v1k wrote

Double check that. I've never seen a company stock scheme that didn't have a holding requirement. Otherwise you can just buy as much as possible at the discounted rate and then sell right away and make bank. My company has a 2-year hold requirement in order to get the discount/match.

2

stuchainz92 OP t1_iuj6bh5 wrote

You’re right—I may have misunderstood the language. The only mention of a holding period says: the tax consequences to you depend on whether or not you meet the special holding period requirements: two years from the start of the offering and one year from purchase.

2

meamemg t1_iuj6nz7 wrote

In addition to taxes, most have restrictions saying you can't sell right away (or that you lose the discount if you do). I'd triple check your documents and make sure there isn't that in there somewhere.

1

Krynthose t1_iujiz7q wrote

There are many plans that allow you to sell right away. It's not unusual but yours is referring to a DD disqualifying disposition which makes you lose the tax favorability if sold before the respective dates.

1

drphungky t1_iuj7w9n wrote

Holding requirements are common but by no means ubiquitous. My last company did not have one. Granted the purchases were done quarterly and I don't know how the money is held in escrow for the three months leading up to the purchase date (presumably they benefitted somehow), but once the purchase clears you were free to sell immediately. The discount was garbage there though, but free money is free money.

2

Krynthose t1_iujipmm wrote

There are a lot of them that don't have sale restrictions, but if it's a qualified plan selling it immediately is a disqualifying disposition and takes the tax favorability away.

1

Dorkus_Mallorkus t1_iuj55lq wrote

The major downside is risk. A single stock can easily tank and you could lose most or all of your investment.

Whether it's worth it often depends on how much of a discount or match they offer, and whether you believe the company is stable enough to maintain or grow its stock price.

My company has a 50% match for all stock purchases, which is amazing, so I bought a bunch over the last 10 years. It had gone up and all was well....then Covid hit and my industry went to shit and the stock went from $60 to $8 overnight. I lost over $20k just like that. It's back up a bit now, but even with the match factored in I've still lost money.

2

stuchainz92 OP t1_iuj5lmd wrote

That is a good consideration, thank you! I’ll say I don’t have the budget to do more than ~$100 per paycheck so at least I wouldn’t be losing a ton if it goes south. If it helps offer any insight, the company is stable and growing and in the finance sector.

2

trilliumsummer t1_iuj5vy1 wrote

The biggest downside is the restrictions. If you have to hold it for a certain time it's a larger risk then if you can sell it immediately.

Also if there's any costs. Pretty much every brokerage has 0 fees for buying stock, but my ESPP has a selling fee even though it's with a firm that otherwise is 0 fees. So it cuts a bit into the upside and only make sense if I'm getting enough to offset the fee.

1

stuchainz92 OP t1_iuj77jq wrote

I will also add that our stock is doing very well and has for the past year. I’m hesitant because I’m not sure how much higher it realistically can go so I’m wondering if I missed my window

1

SquareVehicle t1_iuju73r wrote

Assuming you can sell the stock immediately after it vests (usually every 6 months), there is not a downside. Basically you're putting money in an account to buy company stock at a 15% discount at the end of the 6 month period. So when you sell it, you should see an immediate 15% profit on that by selling it immediately. The exact amount may be slightly higher or lower depending on the specific stock price it was bought at vs the price when you sell, but if you sell the stock the day you get it at market open then that difference will usually be very negligible.

Yes you have to pay some taxes on that 15% profit, but that just makes it a 12% net profit. If you can deal with the cash flow reduction for the first 6 months then it's absolutely worth it because it's free 1.5% bonus (assuming 10% of salary with a 15% stock price discount). After the first 6 months then you can just use the previous money to "pay yourself" to make up the gap, and then there's not even a reduction in your income. It's also a nice enforced savings mechanism.

Most of the negatives are only pertinent if you're required to hold the stock for some period of time before you can sell it. Or if you just decide to hold the stock for some reason and don't sell immediately.

1