Employee stock purchase plans can carry ‘a big risk,’ says advisor. What to know before buying in


2022 report from Morgan Stanley at Work.

complicated tax rules to consider, including levies on the discount. The breakdown of regular income and more favorable long-term capital gains depends on when you sell.

Your employer may also require you to keep the shares for a set period of time. “Some companies have an additional holding period requirement,” Brumberg said. “They don’t want you to flip the shares.”

The gold standard for a plan is going to be a 15% discount with a lookback feature.

Bruce Brumberg

Editor-in-chief and co-founder of myStockOptions.com

Of course, there are other key details to confirm in the plan document.

You’ll want to know whether the ESPP is tax-qualified, which may offer savings, as well as how to enroll, the length of the offering period, purchase dates, how to make changes and what happens if you pull out of the plan, he said.

J.P. Morgan analysis. From 1980 to 2020, nearly 45% of companies from the Russell 3000 Index suffered a 70% price decline from peak and never recovered, the report shows.

Given these risks, experts may suggest an ESPP to compliment your 401(k), rather than as the primary way to save and invest. And you’ll still want to weigh your risk tolerance and goals before enrolling.

An ESPP may be worth considering if you’re already meeting your other financial goals, such as maxing out your 401(k), investing in a brokerage account, paying off debt or other savings goals, McKenna said.

It may work once you’ve “checked all the other boxes,” she said, but it may be better to focus on other planning opportunities first.