423 Employee Stock Purchase
 

My wife has an stock option in her new company for a "Qualified" 423 component and or a NON- 423 option.

What are the differences? Taxation?

In my mind, qualified is like a 401k corporate plan that is pre-tax vs a Roth, post tax.

Or is it options as to when she can sell the options?

I have done some research, and can't figure it out in simple terms.

The CP Brain Trust will provide a clear answer.

not sure all the details but typically ESP plans allow you to purchase the company stock at a discount i.e. 10% depending on the lookback period etc etc

once you purchase the stock I believe you are free to do with it what you want pending any tax liabilities for early sale shit like that

You might have blackout periods where you can't sell depending on your company and how much inside information you might have regarding financials etc

It's an employee stock purchase plan. You can choose to have part of your pay to purchase stock at a discount from the market with no immediate tax consequence. You are subject to short term or long term capital gains when you sell it, and your cost basis is the discounted price. My old company I could buy stock at a 15% discount each quarter. They would withhold money form my check and then purchase the stock. For example, if the stock closed at $100 on 12-31. My accumulated amount that had been deducted from my pay on a bi-weekly basis or a one time basis (i was able to choose several options) would purchase the stock at $85. You could then turn and sell it pretty quickly for current market value, but then it would be considered short term cap gains, or basically ordinary income. If you held it longer than a year, it was consider long term cap gains and was taxed at the federal rate of 22.5%. (20% cap gains and 2.5% obomacare tax). We were limited to $25k a year and I maxed out as the company was a fortune 500 and had a record of decent growth and paid a great dividend, which I reinvested back into the stock. Hope that helps.

https://www.fidelity.com/products/st...0of%20purchase.

423 allows the employee to buy the stock at a discount but the discount isn’t taxable.

The tax shelter is where the qualified plan comes.

So the Qualified 423 is like a 401k? Sheltered from taxes?

She works for an off shoot of American Express travel department. Gets 15% discount on stock purchase.

So from what I understand is: qualified is tax help (shelter), non is not like a Roth but taxable at sale similar to a normal account...taxed a time of sale whether short/long term tax event?

No. She uses after tax dollars to purchase the stocks. But the stocks are at a discount to market price. That discount would normally be taxed as compensation. Under a qualified plan it is not. That is the tax shelter.

That’s my understanding. The only one I ever dealt with was 15 years ago.

Yes, that seems consistent with how Fidelity describes employee stock purchase plans in general and the qualified 423 employee stock purchase plan in particular in the first couple of questions and answers here, https://www.fidelity.com/products/st...0of%20purchase.

There is a small inherent risk in purchasing the stock of the company you work for. Your job is the biggest part of your financial well-being and purchasing stock in that same company concentrates your financial well-being that much more into that company. It increases your risk somewhat by concentrating your finances in one entity. If you're invested in the market, it's unwise to have all of your investments in a single company and buying stock in the company you work for is a similar problem. This is not to say that you shouldn't do it, but that you need to do your due diligence with that purchase just as you would any other and a thorough analysis of how it affects your financial position is part of that analysis.

Do they put a cap/time span on selling?

I mean, that's a 10-15% profit off the top.

Understood. She is going 5% 401k, 5% stock purchase. She went with the non 423 thus is like a regular acct with no tax shelter. I think she will change that to the qualified version.

When I read the 25 page legalize document, it seems to be at least a year to sell. Seems about right, thus incurring only LT cap gains. Guessing some sort of penalty if sold before one year.

Makes sense. It would be a hell of a racket otherwise.

This is from Fidelity. I’m not quite sure what the grant date would be.


Q. When may I sell my stock in an ESPP?
A. Employees can generally sell shares purchased through the employee stock purchase plan at any time. However, if the shares were purchased under a Section 423 plan, the tax consequences will be different depending on how long you have held the shares. To get a favorable tax treatment, you have to hold the shares purchased under a Section 423 plan at least one year after the purchase date, and two years after the grant date.

It might be a vesting situation.

As long as she's not looking to sell them, I'd go with the qualified plan. Getting the discount is an automatic return - much like a 401K match.