Personal finance experts and bloggers of all stripes don’t always agree on everything. But one consensus issue is this: Never leave free money on the table. Workplace plans like the RRSP (for Canadians) and 401Ks (for Americans) get all the attention where free money is concerned, and certainly these are prevalent plans through which employers offer matches. But there is another plan that gets basically no attention on personal finance blogs — it’s called an employee stock purchase plan (ESPP).
If you work for a publicly traded company on a full-time basis, chances are good that your employer offers one. And most people don’t take advantage of them. In fact, the person in your HR department who runs this thing will be considered nothing short of brilliant if 50% of employees opt in. They’ll get invited to speak at conferences and be the toast of the town. I’m not kidding. Anything above 50% uptake is extremely rare, which means the majority of folks in North America who are eligible for this free money are leaving it sitting on the table.
What is an ESPP?
Whereas an RRSP or 401K will most likely allow you to contribute to a mutual fund or an ETF, an ESPP usually only deals with the stock of the company you work for. Oftentimes employers who offer fat-cat stock options strictly to executives will then offer an ESPP widely — to all or most full-time employees. Why? Skin in the game, my friend. Your employer figures that if you own some of its stock, you’ll A) hustle extra hard to see that stock price go up and B) stick around to see some nice returns.
Why should you opt in to your ESPP?
Did I mention the free money? I know some of you reading this may be concerned about owning company stock. Perhaps you don’t really feel like it’s a good investment (not everyone works for Google, right?) or you simply don’t want too many eggs in one basket. Those are very reasonable points, so let’s look at them a little closer.
Yes, the stock price can fall and you may feel you’ve lost money, but you’ve also received some of those shares at either little or no cost to you. Unless your employer goes outright belly-up, you’ll probably still come out on top. (Note: If you are actually concerned your employer could go out of business, don’t sign up for the ESPP, stop reading this article and go dust off your resume). Additionally, you don’t need to hang on to your holdings forever. You have the option of taking advantage of the program, then selling the shares in order to diversify.
Back to that free money. How do these funds get into your pocket? The answer differs on whether you’re in Canada or the US.
ESPPs in Canada
If you’re a Canadian, ESPPs are dead simple. They work on a match basis. For example, you might contribute up to 5% of your pay and then get a match on anywhere from 50% to 100% of your contribution — that part is up to your employer and how sweet of a deal they want to offer you. But the match won’t be in your hot little hand until it vests, typically in 12 months’ time. That’s how these plans are created to help retain you.
ESPPs in the US
Whereas Canadian plans offer a match, US plans offer a discount — which can be as high as 15%. You’ll contribute through payroll deductions — either a fixed dollar amount or a percentage of your paycheque, depending on your company’s plan — and your company will use those funds to make periodic purchases. As soon as the purchase is made, the stock is yours and you can sell it immediately, if you choose. All stock purchase plans have at least this much in common. But there are two subcategories of ESPPs:
Tax-qualified
An employee stock purchase plan that qualifies under Section 423 of the Internal Revenue Code will allow you to postpone payment of tax until you sell your shares. Other tax benefits may be available to you if you hold those shares for an amount of time designated by your employer. It just depends on how they’ve chosen to structure their plan. Chat with your HR person to get the details.
Non-qualified
A non-qualified employee stock purchase plan doesn’t offer tax advantages. Applicable taxes are due at purchase.
The bottom line
Regardless of whether you’re Canadian or American, and the exact type of plan you have, there is almost no downside to a stock purchase plan, thanks to either the match or the discount. So, saunter past your HR department and find out if your company offers one.