First things first, let’s talk about what I learned about ESPPs – why they can be an excellent equity vehicle and how to increase participation.
ESPPs have been around since 1964. They’re one of the oldest equity compensation vehicles, one that has been largely unchanged for decades. Even the IRS’s $25,000 max contribution limit per calendar year has been around since the inception of ESPPs (in that same amount).
In spite of some pretty awesome plan terms, most ESPPs are under subscribed. According to the NASPP/Deloitte 2018 Domestic Stock Plan Administration Survey, 62% of companies with an ESPP reported participation rates of 40% or less of eligible employees. Ironically, according to Shapiro, many investment professionals would kill for the opportunities offered in an ESPP, especially those with features like a lookback and 15% discount. [Disclaimer here: no investment advice is being offered.]
ESPPs may be one of the benefits that most closely mimics the interests of the average shareholder. Yes, in an ESPP shares are purchased by the employee at a discount, whereas shareholders don’t have that option. However, the purchase is made with after tax dollars from the employee’s own funds. When it comes to ESPP plans, shareholders tend to support them.
Cashless loans to purchase ESPP shares may be an option to help participants maximize participation. In a historic move, the IRS issued a private letter ruling in April 2019 to Carver Edison that “…concluded that a participant’s ability to obtain a loan from its employer or a third party to purchase shares under a plan does not prevent the plan from qualifying as an employee stock purchase plan under Section 423(b). The IRS further concluded that the inability of a participant to obtain a loan to purchase shares due to the applicability of the Sarbanes-Oxley Act does not cause some options under the plan to have different “rights and privileges” in violation of Section 423(b)(5).” (Morgan Lewis Article, April 18, 2019)
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