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My Company’s Stock Purchase Plan

by Flexo on October 12, 2006

in Investing

Enrollment starts soon for my company’s stock purchase plan. Here is how it works. If an employee chooses to participate, after-tax funds are deferred from each paycheck and deposited into a cash account at E*Trade, at a rate of 1% to 10% of eligible earnings (salary and overtime). Since the payroll deductions are after-tax, they do not reduce taxable income.

At the end of each quarter, the funds are used to buy company stock at a 15% discount. The discount is calculated on the lower value of either the stock price at the beginning of the quarter or at the end of the quarter.

Employees can sell their stock at any time, but the company suggests holding on for more than two years due to “certain tax advantages,” which I am assuming refers to the lower long-term capital gains rate.

I will participate, but I will likely reduce my 401(k) referral rate in order to do so. I’m currently investing 12% of my paycheck into the 401(k), but only 4% of my salary is being matched by the employer. This might already be too damaging to my cash flow, so once enrollment begins I might lower the contributions to 4% to the 401(k) and 4% to 6% for the stock purchase plan.

My company’s stock has done quite well. I work in a large financial services firm that went public only a few years ago, and the stock price has more than doubled in price. I was not with the company when it went public, so I missed out on the first stock award.

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Flexo, the owner and creator of Consumerism Commentary, has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about him and follow him on Twitter.

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  • Congrats! My employer once had a great benefit just like this one too. Now its been reduced to a 5% discount and there is no longer an optioning effect like you are offered - the price offered is the market price on the pay date.

    I think you will find the return on you new benefit enough to take advantage of it as much as you can.
  • Sun
    It's really quite a generous offer at 15% discount. Hope your company's stock can stay its current trend long enough for you to take full advantage of the benefit.

    However, when you reduce your 401(k) contribution to 4%, are you still maxing out to the limit? If not, is it good in long term?
  • 4% is the minimum I can put into 401(k) to achieve maximum employer match. For me to contribute the IRS maximum of $15,000 into the 401(k), I'd have to defer about 33%. I can't afford that. I'm not sure what you mean by "is it good in long term..." is the investment good? The 401(k) has done well so far, but past performance doesn't predict future results...
  • My employer offers a very similar program that I take advantage of (except the purchase period is every 6 months rather than every 3 months).

    I believe very strongly in _not_ holding onto the stock for two years to get the tax benefits.

    My company is the major employer in my area. Therefore my house's value is dependent on my employer's success. My paycheck is dependent on my employer's success. Any index fund I own is impacted by my employer's success. My stock options are _very_ dependent on my employer's success.

    In other words, my finances are already far too heavily dependent on my employer. Owning company stock, even for tax benefits, just doesn't make good sense.

    Also, while the returns from an employee stock purchase program are great, I'm not sure it's a good idea to cut back on your 401k contributions. If you sell the stock at the end of the 3 month period, you can replace the lost income from the next 3 months' contributions with the proceeds. Aside from the first 3 months, there should be no need to cut your 401k contribution.
  • Why not keep up the 401(k) contributions, and then flip the stocks immediately to cash in on the 15% discount, but not hurt your overall cash flow?
  • Todd
    Our stock purchase plan offers a 15% discount and the stock is bought quarterly. I used to use a few percent of pay, but then read someones blog and decided to also max out my purchases to 10% of pay. It comes out to a few thousand a quarter. This last quarter had the best purchase price since I have taken advantage of the program with approx. 25% instant return. It is the easiest money you will ever make. Max out your stock purchase and leave your 401k as is.
  • My ESPP doesn't offer a discount; shares are purchased monthly with the cash I've deposited into the account, using the average price of the 5 days leading up to the purchase date.

    I don't have too much money wrapped up in the plan; I have a rather small amount put into it each month, but I don't even miss the money and it's been growing decently (stock is up almost 50% over the past year).

    I haven't decided yet whether I'll be increasing my contribution next year or not. I know I should probably increase tax-deferred investment plans first (401k) but I'm not terribly impressed with the plan we have.

    My previous employer had a discount plan which was confusing to me and required a large up-front cash outlay. You could buy in once a year at a certain price (lower than the current trading price), had to hold for a certain amount of time, and were guaranteed a minimum payout. I never got into it because it was complicated, and seemed to be tilted in favor of people who intended to stay with the company for a long time; at the time the plan was first offered, I was already looking for a new job.
  • Andy,

    I hate it when I get into situations like that. Too often I get into a situation where it seems like a carrot is being placed in front of me when I am already in a position where I am not pleased. If basically becomes a nearly worthless benefit, because I will not be there long enough. Currently, I get a 10% profit sharing contribution to my 401(k), but it is not vested, and I don't think I am going to stick around for it to get vested... which is a pity. Fortunately, they match my first 5% with 4%, and it is vested. I just bumped my contributions to 6% so that I am getting an even 10% of my pay placed into my 401(k).

    The job I am interviewing for looks to offer a 6% match on my first 6%, so that will be great. And with the nice salary increase I will be getting, it won't be too much smaller than the dollar figure I was getting with the total of 19% that I was getting contributed (5% by me, 4% match, and 10% profit sharing). Plus, I get ESPP with the new company, which will be awesome.
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