Non qualified unique ESPP question

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jm1495
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Non qualified unique ESPP question

Post by jm1495 »

The megacorp that I work for offers an ESPP on a monthly purchase with a %15 benefit, no look back and three month mandatory holding period.
The max contribution is $40k that yields a $6k benefit annually.

For example if I contribute $86.95/month, Megacorp contributes (15%) $13.05 into the ESPP account for a total of $100 and purchases stock on execution day.
For ease let's say the stock is $100. I now own 1 share and must hold it for three months before selling. I'm subject to market variability for those three months of holding and I sell immediately. In the 1.5 years that I've been in the program I've had a total return of %12.

The only individual stock I own is through the ESPP everything else is indexed. I max the HSA, and contribute ~16k to the 401k (including company match).

How would you approach this ESPP? TYIA
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SmileyFace
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Re: Non qualified unique ESPP question

Post by SmileyFace »

Are you sure you can contribute $40K annually?
My understanding is that IRS limits ESPP programs to $25K annually (and that is pre discount).
I would still participate- max up to the $25K. I don't get the $40K
Topic Author
jm1495
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Re: Non qualified unique ESPP question

Post by jm1495 »

SmileyFace wrote: Tue Mar 21, 2023 11:21 am Are you sure you can contribute $40K annually?
My understanding is that IRS limits ESPP programs to $25K annually (and that is pre discount).
I would still participate- max up to the $25K. I don't get the $40K
I am certain that I can contribute up to $40k per the plan documentation. The maximum benefit is $6k $6k/.15 = $40k. I believe this is possible because it's a non qualified plan.
8301
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Re: Non qualified unique ESPP question

Post by 8301 »

jm1495 wrote: Tue Mar 21, 2023 11:46 am
SmileyFace wrote: Tue Mar 21, 2023 11:21 am Are you sure you can contribute $40K annually?
My understanding is that IRS limits ESPP programs to $25K annually (and that is pre discount).
I would still participate- max up to the $25K. I don't get the $40K
I am certain that I can contribute up to $40k per the plan documentation. The maximum benefit is $6k $6k/.15 = $40k
$25k pre-discount per calendar year.
Topic Author
jm1495
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Re: Non qualified unique ESPP question

Post by jm1495 »

It's a nonqualified plan and isn't subject to the limit of a qualified plan.
sailaway
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Re: Non qualified unique ESPP question

Post by sailaway »

jm1495 wrote: Tue Mar 21, 2023 12:41 pm It's a nonqualified plan and isn't subject to the limit of a qualified plan.
This means you are paying tax in the discount at the time of purchase, rather than sale. Are you maxing out the company match, is that why you stop short of filling your 401k? Is there a reason you have decided that this is optimal?

I wouldn't be crazy about the holding period, but 12% return over the last 1.5 years is nothing to sneeze at.
erp
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Re: Non qualified unique ESPP question

Post by erp »

sailaway wrote: Tue Mar 21, 2023 12:55 pm
jm1495 wrote: Tue Mar 21, 2023 12:41 pm It's a nonqualified plan and isn't subject to the limit of a qualified plan.
This means you are paying tax in the discount at the time of purchase, rather than sale. Are you maxing out the company match, is that why you stop short of filling your 401k? Is there a reason you have decided that this is optimal?

I wouldn't be crazy about the holding period, but 12% return over the last 1.5 years is nothing to sneeze at.
And it isn't that clear if the 12% includes the 15% match. That is included in the basis already, so maybe he really means he's getting a 1.15*1.12 return. That would be great!

Once the 3 month pipe is filled, you can just sell each month, so you really never have more than 10k at risk for a 6k gain per year. For any purchase, if the stock does not drop more than .15/1.15 = 13% before you sell in 3 months, then you will be profitable for that month.

I agree about the 401k. Max that each year if possible.
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FiveK
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Re: Non qualified unique ESPP question

Post by FiveK »

jm1495 wrote: Tue Mar 21, 2023 11:13 am How would you approach this ESPP?
Contribute the maximum allowed, then sell ASAP after the shares are available to you and invest the proceeds according to your desired asset allocation.

See also Your 1099-B form for an ESPP sale will probably be wrong, although because you already understand that there are non-qualified vs. qualified ESPPs you may know about the 1099-B issue already.
Topic Author
jm1495
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Re: Non qualified unique ESPP question

Post by jm1495 »

erp wrote: Tue Mar 21, 2023 2:02 pm
sailaway wrote: Tue Mar 21, 2023 12:55 pm
jm1495 wrote: Tue Mar 21, 2023 12:41 pm It's a nonqualified plan and isn't subject to the limit of a qualified plan.
This means you are paying tax in the discount at the time of purchase, rather than sale. Are you maxing out the company match, is that why you stop short of filling your 401k? Is there a reason you have decided that this is optimal?

I wouldn't be crazy about the holding period, but 12% return over the last 1.5 years is nothing to sneeze at.
And it isn't that clear if the 12% includes the 15% match. That is included in the basis already, so maybe he really means he's getting a 1.15*1.12 return. That would be great!

Once the 3 month pipe is filled, you can just sell each month, so you really never have more than 10k at risk for a 6k gain per year. For any purchase, if the stock does not drop more than .15/1.15 = 13% before you sell in 3 months, then you will be profitable for that month.

I agree about the 401k. Max that each year if possible.
The 12% includes the 15% match. The stock has been flat to slightly down over the 1.5 years. I like the logic of only have 10k at risk, that makes sense.
Topic Author
jm1495
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Re: Non qualified unique ESPP question

Post by jm1495 »

sailaway wrote: Tue Mar 21, 2023 12:55 pm
jm1495 wrote: Tue Mar 21, 2023 12:41 pm It's a nonqualified plan and isn't subject to the limit of a qualified plan.
This means you are paying tax in the discount at the time of purchase, rather than sale. Are you maxing out the company match, is that why you stop short of filling your 401k? Is there a reason you have decided that this is optimal?

I wouldn't be crazy about the holding period, but 12% return over the last 1.5 years is nothing to sneeze at.
Based on cashflow and bills it's what I'm comfortable with currently. I'm definitely maxing out the company match.
erp
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Re: Non qualified unique ESPP question

Post by erp »

jm1495 wrote: Wed Mar 22, 2023 8:21 am Based on cashflow and bills it's what I'm comfortable with currently. I'm definitely maxing out the company match.
Just remember that the sales are part of your cashflow. ie don't just look at your takehome paycheck and think you have $3333 less, if the $3833+/- sales are replacing it.
jm1495 wrote: Wed Mar 22, 2023 8:17 am The 12% includes the 15% match. The stock has been flat to slightly down over the 1.5 years. I like the logic of only have 10k at risk, that makes sense.
There might be the issue of wash sales if the purchase is every 30 days, while the sales are at a small loss. Eg. you purchase $3833 in Jan, then you sell in Apr for $3700. You would normally have a $133 loss, but since you also bought in Apr again, the broker might call it a wash sale. That would change your April basis up to $3966 (even tho you really only spent 3833). When you go to sell it, there would be another loss and the cycle continues.
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