Section 423 ESPP Requirements
Section 423(b) of the Internal Revenue Code requires that Employee Stock Purchase Plans ("ESPPs") meet the following criteria to be considered qualified:
- Employees Only. Only employees of the plan sponsor (or its parent or subsidiary corporations) may participate in the ESPP. Thus, for example, consultants and non-employee directors may not participate in an ESPP.
- Shareholder Approval. An ESPP must be approved by the shareholders of the plan's sponsor within twelve (12) months before or after the ESPP is adopted by the board.
- No 5% Shareholders. Any employee who owns five percent (5%) or more of the stock of the plan sponsor may not participate in the ESPP.
- Eligibility. All eligible employees must be allowed to participate in the ESPP, although certain categories of employees may be excluded:
- employees employed less than two years;
- employees whose customary employment is twenty (20) hours or less per week;
- employees whose customary employment is for less than five (5) months in a calendar year; and
- "highly compensated" employees (as defined in Section 414(q) of the Code).
- Equal Rights and Privileges. All ESPP participants must enjoy the same rights and privileges under the plan, except that the amount of stock that may be purchased may be based on compensation differences (e.g., a percentage of compensation).
- Purchase Price. The purchase price may not be less than the lesser of 85% of the fair market value of the stock (i) at the beginning of the offering period, or (ii) on the purchase date.
- Maximum Term. The maximum term of offering periods under an ESPP may not exceed twenty-seven (27) months unless the purchase price is based solely on the fair market value at the time of purchase, in which case the offering period may be as long as five (5) years.
- $25,000 Limit. Under all ESPPs of the employer company and its parent and subsidiary corporations, an employee may not purchase more than $25,000 worth of stock (determined based on the fair market value on the first day of the offering period) for each calendar year in which the offering period is in effect.
- Non-transferability. An employee's right to purchase stock under the ESPP may not be transferred except by will of the laws of descent and distribution and may be exercisable during the employee's life only by the employee.