Employee Stock Purchase Plan (ESPP)
Also: ESPP, employee stock purchase plan, Section 423 plan
A payroll-deduction plan that lets employees buy company stock at a discount, often 15%, with a lookback provision that prices the shares at the lower of offering-period start or purchase date.
A qualified ESPP under Section 423 lets employees divert after-tax payroll into buying employer stock at up to a 15% discount. The best plans include a lookback: the purchase price is 85% of the lower of the stock price on the offering-date or purchase-date. The IRS caps qualified ESPP purchases at $25,000 of grant-date FMV per calendar year.
Example: offering-date price $100, purchase-date price $140, 15% discount. The purchase price is $85, producing an immediate $55 paper gain per share. Holding two years from offering and one year from purchase qualifies part of the gain as long-term capital gain and caps the ordinary income portion at the offering-date discount.
Common mistake: letting ESPP shares sit for years to chase the qualifying disposition while the position grows to 20% of net worth. The tax benefit rarely justifies that level of concentration. Many plan their ESPP as a sell-at-purchase loop, capturing the 15% plus lookback as compensation and redeploying the cash.
ESPP matters most when cash flow allows the full 15% payroll election and the discount is well above the tax drag of a same-day sale.