Employee Stock Purchase Plans

Overview of Employee Stock Purchase Plans (ESPP)

In a typical ESPP, employees are given an “option” to purchase employer stock at a favorable price at the end of an “offering period.” 

Many companies choose to implement an ESPP that qualifies for preferential tax treatment under Section 423 of the Internal Revenue Code. This increases the company’s administrative burden because the plan must be operated in compliance with the requirements specified in Section 423.

Also, choosing to operate a Section 423 qualified plan means designing a program within certain limits (e.g., eligible participants, minimum purchase price, length of offering period). In addition to monitoring ongoing compliance with Section 423, the company is also responsible for tracking sales and other dispositions of stock acquired under the plan and for compliance with the notification requirements of Section 6039 of the Code.

Where companies want to implement a plan that provides benefits not permissible under Section 423 or where companies do not want to take on the obligations of complying with Section 423 and related tax codes, they may implement a non-qualified ESPP.