Employee Stock Ownership: ESOPs and ESPPs

I have seen three types of employer offerings related to employee stock ownership. I talked about the first in this post – allowing employees to purchase company stock in their defined contribution plans.  The second is and ESOP or Employee Stock Ownership Plan. The third, an ESPP or Employee Stock Purchase Plan let you buy company stock, often at a discount.

Employee Stock Ownership Plan (ESOP)

The first is an Employee Stock Ownership Plan (ESOP) which an employer can set up as a component of its defined contribution plan.  (For more information about defined contribution plans, see my post on that topic.) Under an ESOP, an employer contributes company stock to an employee’s defined contribution account.  The employee cannot sell the stock until he or she resigns or retires from the company, though there are exceptions.

If you want to diversify your company stock holdings, you’ll need to talk to your human resources representative to understand your options, if any.  ESOP contributions are usually subject to vesting (increased ownership by the employee as his or her tenure with the company increases). When the employee retires or resigns, he or she will either receive a lump sum or periodic payments, depending on the terms of the plan.

Employee Stock Purchase Plan

The second is an Employee Stock Purchase Plan (ESPP).  An ESPP allows employees to purchase company stock through payroll deductions.  Many employers offer their company stock at a price lower than is available if purchased on a stock exchange.  The ability to purchase the stock at a discount can be a real benefit, as long as the stock price doesn’t go any lower than your purchase price before you sell it.  

ESPPs have varying rules as to how long you have to hold the stock before you can sell it. Also, the tax treatment may be different based on how long you hold the stock.  As I discussed in last week’s post about owning company stock in my 401(k), I preferred to not have much of my investments in my employer’s stock. Therefore, I generally purchased stock through the ESPP, but sold it as soon as was allowed to lock in the benefit of the discounted purchase price.