26 Sep 2023

Make My Day! Using Employee Stock Purchase Plans as a Broad-Based Employee Incentive

Employers who adopt an employee stock purchase plan (ESPP) have a chance to give employees a stake in their employer’s success by purchasing employer stock at a discounted price. On the employee’s / former employee’s sale or disposition of the shares acquired under the ESPP, the employee will have taxable income (or a deductible loss) in an amount equal to the difference between the amount the employee paid for the shares and the amount the employee receives on the sale or disposition. Normally, the difference will be treated as capital gain income (or loss), but in certain circumstances the employee may also have ordinary income. There’s a lot to learn.

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Related Content

  • Qualified ESPP Drafting Checklist
    Use this checklist to ensure that an ESPP intended to satisfy the requirements of I.R.C. § 423 meets all of the necessary conditions for favorable tax treatment of the purchase rights granted under the plan. ESPPs allow the sponsoring corporation to grant to its employees—and the employees of its related corporations—rights to purchase stock of the sponsoring corporation at a price that often is discounted between 5% and 15% of the underlying stock’s fair market value. If ESPP participants satisfy certain holding requirements, the acquisition of stock through a qualified ESPP is not a taxable event.
  • Board Resolutions: Qualified ESPP Adoption
    Reference our board resolution template, which is designed to be used by a company’s board of directors to adopt an ESPP that satisfies I.R.C. § 423.

Practical Guidance Updates 

Featuring the latest updates from your Practical Guidance account.    

  • Employee Benefits & Executive Compensation Key Legal Developments Tracker
    Stay informed on new developments.
    • Retirement Plans. The American Bar Association posted a summary of the May 3, 2023, meeting between PBGC representatives and members of the ABA's Joint Committee on Employee Benefits. Among other topics, PBGC addressed common errors detected in standard termination audits, and reported that 78 initial or supplemental applications for the PBGC's Special Financial Assistance Program had been approved since the program’s introduction. ABA, Joint Committee on Employee Benefits Report on May 3, 2023, Session with PBGC.
    • Retirement Plans. The PBGC revised final regulations on the allocation of assets in single-employer plans to prescribe interest assumptions for plans with valuation dates in the fourth quarter of 2023. These interest assumptions are used for valuing benefits under terminating single-employer plans and for other purposes. 88 Fed. Reg. 62706 (Sept. 13, 2023).
    • Health and Welfare Plans. IRS issues a 2024 index adjustment for Affordable Care Act (ACA) contribution percentages used to determine affordability under the ACA employer shared responsibility mandate that applies to applicable large employers (ALEs). The required contribution percentage for ALEs will decrease in 2024 to 8.39% (from 9.12% for 2023). Under I.R.C. § 36B, individuals are eligible for a premium tax credit if their employer does not offer them affordable coverage that provides minimum value (that is, the premiums exceed the required contribution percentage multiplied by household income). Plus, under I.R.C § 4980H, ALEs can be responsible for employer shared responsibility payments for any month when: (1) the ALE fails to offer full-time employees and their dependents minimum essential coverage (MEC), and (2) it offers full-time employees a MEC that is unaffordable. Rev. Proc. 2023-29.

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