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What is an employee stock purchase plan (ESPP)?

Employee stock purchase plans (ESPP) are stock benefits provided to employees that allows them the right to purchase (option) the organizations stock by applying post tax deductions from their paychecks.

Generally, the plan will specify that the price in which employees pay per share will be less than the stock’s fair market value. Qualified ESPP plans will offer discounts of up to 15% on the purchase of the stock. Employee stock purchase plans will generally have four phases in its life cycle:

Phase 1: Grant – The employer will offer its employees the right to purchase back the company stock at a predetermined price.

Phase 2: Offer – The employee will accumulate available funds in order to purchase future amounts of the company’s stock. These funds will accumulate post tax and will generally be deducted from the employee’s paycheck each pay period.

Phase 3: Transfer – Once the offering period as completed, the employee will then take the accumulated funds available and subsequently purchase shares of the company’s stock. Along with transferring ownership of the shares, the company will then issue Form 3922 to its employees as well as to the Internal Revenue Service.

Phase 4: Disposition – Once the shares have been transferred to the employee, they will have the right to sell them when they choose.

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