What is an ESPP?

An Employee Stock Purchase Plan (ESPP) is a tax-efficient means by which employees of a corporation can periodically purchase the corporation's stock through automatic deductions from their paychecks – typically as a percentage of compensation or a whole dollar amount, dependent on the plan. Contributions are accumulated during a specified period (offering period), and the company uses the accumulated funds to purchase shares on the participating employee's behalf on pre-determined purchase dates. Under most ESPPs, the purchase price is a discounted price. Some plans include a "look-back" feature, which compares the share price at the beginning and end of the offering period and uses the lower price to determine the purchase price. The purpose of an ESPP is to encourage broad-based employee ownership of employer stock. 

ESPPs can either be qualified or non-qualified. The majority of publicly disclosed ESPPs in the United States are tax-qualified plans that follow the rules of Section 423 of the Internal Revenue Code. Through an ESPP that qualifies under Sections 423, an employee subject to U.S. tax law can purchase stock at a discount of as much as 15% lower than the fair market value and, if certain holding period requirements are met, receive preferred tax treatment upon sale of the ESPP shares. 
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