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  • Writer's picture Treavor Dodsworth CFP®, CPA, CKA®

#165 - Should I Participate in the ESPP Program?

ESPP Program

While I can't give a blanket yes (see cautions below) for many individuals participating in an ESPP will make you money and, as all the Apple employees that are reading know, it could potentially be a very good return.

While not all ESPP programs work the same, generally you have money withheld from your pay over a certain time period (six months for example). The company then gives you stock for that contribution but at a discounted price (fifteen percent for example). The amazing thing is some ESPP programs base the discount on the price of the stock at the beginning of the period or at the end of the period whichever is LOWER (lookback provision). The price at which you buy the stock could be significantly lower than the fair market value if the stock went up over the offering period. If the stock went down during the offering period you are still getting stock at the stated discount. In other words, with many ESPP programs, it is not if you will earn a discount but just how great the discount will be.

Below is roughly how the ESPP program has worked at Apple over the last three years. Not all ESPP programs are set up the same.

The chart is based on an Apple employee that contributes $25,000 per year to the ESPP program. They receive a 15% discount off the lower of the grant date price or purchase date price. The example assumes they sell immediately once received (at the end of each six months) and incur a 35% tax on the gain (situation specific). Over the last three years, in this example they would be $27K ahead vs. if they had not participated in the ESPP program at all and just had the funds accumulate in cash.

A few cautions:

  • After looking at the chart someone will say, "Well I wouldn't have just kept my money in cash I would have earned a return on it." That is true. Participating in the ESPP program locks your money up for that period. If you don’t have the cash flow to participate or if there is a really great opportunity cost you may not come out ahead. That said, you are typically only locking your funds up for the offering period- six months in this example.

  • Taxation of ESPP is complex. It is usually more tax efficient to wait to sell the stock until one year after purchasing and at least two years after the offering period. That said, that means you are subjecting yourself to keeping that money in that single stock until you sell. You run the risk of getting over-concentrated in an individual holding. That stock can go up or down (even to zero). If you decide not to sell immediately, you may not get the most favorable tax position but you also are subjecting yourself to the volatility of that stock.

  • While the provisions I outlined (or similar provisions) apply to many ESPP programs, there are several variations so be sure to look at your company's offering specifically.

So should you participate in the ESPP program? While admittedly I can't give a blanket yes, in many cases the answer is yes using an ESPP can assist you in reaching financial goals sooner.

  • Take a look at the chart in the middle of the article under the heading “How do you make money from an ESPP?” It illustrates well how even if a stock goes down during the offering period you could end up with pre-tax returns north of 15% (depending on how your ESPP is set up).


Thank you for reading!

Images from Pexels: photographer Gustavo Fring


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