FAQs – Employee Stock Purchase Plans

Q. What is an employee stock purchase plan?
A. An employee stock purchase plan, (ESPP) is a type of broad-based stock plan that allows employees to use after-tax payroll deductions to acquire their company's stock, usually at a discount of up to 15%.
Q. What is a qualified section 423 Plan?
A. A qualified 423 employee stock purchase plan allows employees under U.S. tax law to purchase stock at a discount from fair market value without any taxes owed on the discount at the time of purchase. In some cases, a holding period will be required for the purchased stock in order to receive favorable long-term capital gains tax treatment on a portion of your gains when the shares are sold.
Q. What is a non-qualified ESPP?
A non-qualified employee stock purchase plan usually works like and is structured like qualified 423 plan, but without the preferred tax treatment for employees.
Q. Who is eligible to participate in the plan?
A. Usually all employees are eligible to participate, however, depending on the plan rules, each company may have unique eligibility requirements. Employees should carefully read their plan documents.
Additionally, a plan may not make a grant to an employee owning more than 5% or more of the voting power or value of all classes of stock of the employer or its parent and subsidiaries.
Q. How do I enroll in an employee stock purchase plan?
A. You can enroll in the plan online through Fidelity.com or netbenefits.fidelity.com by clicking the Enroll link next to your company plan name. You can also enroll through a Fidelity representative during the applicable enrollment period set by the company. The enrollment period is typically two to four weeks prior to the offering period. Some plans disallow participants from enrolling after the enrollment period ends and those participants must wait until the following offering period to participate in the plan.
Check your plan documents to confirm enrollment policies.
Q. How do I use the Fidelity account?
A. Think of your Fidelity Account as an all in one brokerage account offering cash management services, planning and guidance tools, online trading, and a wide range of investments like stock, bonds and mutual funds. Use your Fidelity Account as a gateway to investment products and services that can help meet your needs. Learn more.
Q. What is an offering period?
A. An offering period is the time during which payroll deductions are accumulated. Shares are typically purchased under the plan at the end of this offering period, and shares are deposited in the employee's Fidelity Account.
Q. How much can I contribute to my ESPP?
A. The amount you can contribute depends on your plan and may also be subject to the regulatory dollar limits under the section 423 of the tax code. Under most plans, you may elect to have a maximum of 15% and a minimum of 1% of your compensation withheld each pay period (your company will set forth the allowable range in the plan documents). Under federal tax rules, in a qualified section 423 plan, in no case can you purchase more than $25,000 worth of stock in any calendar year.
Q. How often can I change my payroll deductions?
A. Policies regarding number of changes to payroll deductions are available in the plan documents. Typically, plans only allow you to increase or decrease your payroll deduction percentage or dollar amount. A plan may only allow for a maximum number of changes to be made per offering period. A plan may also suspend participants from the offering period if they reduce their percentage to zero.
Q. How does a withdrawal work in an ESPP?
A. With most employee stock purchase plans, employees can withdraw from the plan at any time before the purchase. Withdrawals are done on Fidelity.com or through a representative.
However, employees should review plan documents to determine rules governing withdrawals.
Q. If permitted, how can I change my payroll deduction?
A. After logging on to your account, select “View or Change Payroll Deductions” from the left side table of contents. Indicate your payroll change within the “New Payroll Deduction” and click preview payroll deductions.
Q. When may I sell my stock in an ESPP?
A. Employees can generally sell shares purchased through the employee stock purchase plan at any time. However, if the shares were purchased under a Section 423 plan, the tax consequences will be different depending on how long you have held the shares. To get a favorable tax treatment, you have to hold the shares purchased under a Section 423 plan at least one year after the purchase date, and two years after the grant date.
Q. How am I taxed in my ESPP?
A. With qualified Section 423 employee stock purchase plans, you are not taxed at the time the shares are purchased, only when you sell. Depending on whether the shares were held for the required holding period, a portion of your gain may be taxed as capital gains or as ordinary income.
For nonqualified employee stock purchase plans, the difference between the fair market value of the stock and the amount you paid is treated and taxed like the spread in a non-qualified stock option as ordinary income and tax is owed on the purchase.
Q. Will the company withhold taxes upon sale of stock purchased under the employee stock purchase plan?
A. Most employers do not withhold any taxes on purchases in a qualified Section 423 plan. However, the ordinary income recognized upon a disqualifying disposition is taxable compensation that your employer should report on the form W-2.
On a purchase in a non-qualified employee stock purchase plan, your employer will be required to withhold on the taxable portion of the purchase.