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ESPP Design: Match vs. Discount - YouTube
Channel: National Association of Stock Plan Professionals
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a contribution
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match is the same thing as offering a
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discounted purchase price
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in an employee stock purchase plan so
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why would a company do one versus the
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other
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in today's video i'm going to talk about
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why i think a match
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is a great idea
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like i said a match and a discount are
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economically the same thing
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offering a 15 discount is the same thing
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as paying employees a 17.6
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match on their contributions don't
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believe me
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go ahead get out excel set up your
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formulas
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make all your different contribution
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assumptions do all your different stock
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price scenarios
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in the end you'll see that i'm right a
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15 discount
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always works out to the same thing as a
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17.6
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match so
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if they're economically the same thing
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why would one be better than the other
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i think a match is a lot easier for
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employees to understand
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there's a good chance they're already
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familiar with the idea of a match
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because maybe you have a 401k plan that
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they participate in where they get a
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match
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or if you don't maybe they had one a
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401k at a prior employer
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or maybe their spouse participates in a
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401k with a match
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matches in 401k plans are all over the
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place
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and as a result people are just a lot
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more familiar with the idea
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of a match i also think that the idea of
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a match is a little bit more intuitive
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to go to employees and say
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hey you contribute a hundred dollars and
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we're gonna contribute another seventeen
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dollars and sixty cents
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on top of your hundred dollars and you
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get to buy stock with all of that
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that's really straightforward to
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understand versus going to employees and
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saying you contribute 100
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you're going to buy stock the price is
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going to be discounted
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and uh the discount is kind of like
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having a coupon that lets you buy
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something at a discount
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but you know coupons are complicated if
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you've ever tried to use them at the
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grocery store
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and for employees who aren't really
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familiar or comfortable with buying
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stock
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the discount can be a hard concept to
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understand
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i also think that having a match can
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help mitigate what i refer to as
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savings account syndrome you may have
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noticed that some of your employees
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contribute to the espp and then they
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withdraw
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all of their funds right before the
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purchase date
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they are essentially using the plan as a
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savings account
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but it is a very inefficient savings
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account
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because they are not realizing any sort
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of return
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on the contributions that they invested
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and i think that when you offer a
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discount
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it can be easy for employees to choose
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to walk away from that
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particularly if they're not comfortable
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with buying stock they really are just
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trying to save money i think it's easy
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for them to say well
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i don't care about the discount i don't
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really want to own stock anyway
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so i'm just going to take my money out
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before before the purchase happens
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but if you pay a match on those
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contributions
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then employees are looking at their
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account and they're saying oh i've
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contributed a hundred dollars
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and now there's an extra 17 in change in
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that account
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that the company paid me to match my
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contributions
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and if i take my hundred dollars out i'm
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going to forfeit that 17
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and change uh it's it's sort of a very
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real
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tangible benefit that they are giving up
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by withdrawing their money early
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and i think it might be enough to
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convince some employees to stay in the
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plan
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and then lastly a match can help
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facilitate tax withholding
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now for your u.s employees if you have a
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qualified espp
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you're not really worried about tax
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withholding but if you've extended your
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employ stock purchase plan
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outside the u.s you know that there are
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lots
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of countries where you do have to
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withhold taxes
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when employees buy stock in the plan and
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trying to collect those withholding
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taxes can be
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very cumbersome with a match however
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this will depend on how the plan is
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structured but it might be possible it
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certainly is possible to structure the
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plan
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so that you can withhold taxes when the
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match is deposited
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into employees accounts so you're really
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paying the employer will be prepaying
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their taxes
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the taxes are just withheld on the match
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they might be withheld from employees
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other pay during the period or they
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might be withheld from the match itself
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but having that match can really help
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facilitate
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tax withholding outside the u.s
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so now that we've covered why i like the
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idea of a match
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to be fair we should talk about what a
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discount has going for it
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the main thing that a discount has going
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for it is that you can
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offer a discount under a section 423
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qualified
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plan unfortunately even though a match
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and a discount are economically the same
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thing
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unfortunately the way section 423 is
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drafted
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it is not clear that you can offer a
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match and have the plan be
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qualified so if you are committed to a
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section 423 qualified plan
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you're stuck with a discount
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i think however that you should consider
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a non-qualified plan a non-qualified
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plan is
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a much less u.s centric benefit if you
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extend
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your employee stock purchase plan
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worldwide
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then your qualified espp offers a
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tax benefit to your u.s employees that
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nobody else
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is entitled to that qualified plan
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inherently favors
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your u.s employees by moving to a
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non-qualified plan
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you put everybody on an equal footing
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and you have a plan that is more fair
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for all of your employees in addition
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a non-qualified plan is a lot more
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flexible
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there aren't all those requirements that
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you have to comply with in section 423
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you don't have to worry that one little
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tiny mistake is going to disqualify the
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entire plan
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from the tax treatment you told
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employees they would be entitled to
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you don't have to track disqualifying
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dispositions you don't have to worry
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about form 3922
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there's no 25 000 limit uh it is just a
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non-qualified plan is just much easier
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to work with
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and then just like i think a match is
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easier to explain to employees than a
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discount
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i also think that the taxation for a
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non-qualified plan
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is a lot easier to explain than
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than the taxation for a qualified plan
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if you've ever tried to explain to
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employees
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what the holding period is and how
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qualifying dispositions are taxed
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then you know exactly what i am talking
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about
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whereas with a non-qualified plan the
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taxation is easy
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you just tell employees you're going to
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be taxed on the spread
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at the time you buy the stock and
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anything you earn after that
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is a capital gain
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so that is my quick take on match versus
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discount in an employee stock purchase
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plan
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i hope you enjoyed the video if you did
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