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.
Updated March 24, 2017 and originally published October 12, 2006.