What Happens to ESPP When You Leave?

Employee Stock Purchase Plans (ESPPs) are employer-sponsored programs that allow employees to buy company stock, typically at a discounted price. Participants usually contribute to these plans through regular payroll deductions, which accumulate over a specific period before shares are purchased. Understanding the implications for an ESPP when transitioning from a company is important for effective financial management.

Unused Contributions and Ongoing Purchase Periods

When an employee leaves a company, funds contributed to an ESPP that have not yet been used to purchase shares are typically refunded. This refund usually occurs through payroll.

Some plans might permit a pro-rata purchase of shares up to the employee’s termination date. This means a portion of the accumulated funds could still be used to buy company stock at the discounted rate, even if the full purchase period has not concluded. However, this feature is not standard and is often rare. While rare, some plan designs could include forfeiture clauses for unpurchased contributions.

Any unexercised purchase rights within an ongoing offering period are typically forfeited upon an employee’s departure. For instance, if an employee leaves mid-way through a six-month offering period, they generally cannot use the accumulated payroll deductions to purchase shares at the end of that period. It is important for employees to consult their specific plan documents for the precise rules governing these situations, as provisions can vary significantly between companies.

Shares Held in Your Account

Once shares have been purchased through an ESPP, they become the property of the employee, regardless of their employment status. These shares are typically held in a brokerage account, either with the plan administrator or sometimes transferred to a personal investment account. Unlike some other forms of equity compensation, such as Restricted Stock Units (RSUs), ESPP shares are generally not subject to vesting periods.

Employees holding purchased ESPP shares have several options after leaving their job. They can choose to continue holding the shares, sell them immediately, or transfer them to another brokerage account of their choosing. The decision to hold or sell often depends on individual financial goals and market conditions.

Certain restrictions might still apply to these shares, even after an employee’s departure. Companies may have specific holding periods or trading blackout windows, particularly if the shares were recently acquired or if the former employee was subject to insider trading policies. These restrictions are usually outlined in the company’s trading policy or plan documents. Accessing and managing these shares after leaving the company typically involves logging into the plan administrator’s online portal, which remains accessible to former employees.

Tax Considerations Upon Leaving

The tax implications of ESPP shares upon leaving a company depend significantly on the timing of when the shares are sold relative to their original purchase and offering dates.

A “qualified disposition” occurs when shares are sold more than two years from the offering date and more than one year from the purchase date. In this favorable scenario, the discount received at the time of purchase is taxed as ordinary income, while any additional gain beyond the discounted purchase price is taxed as a long-term capital gain.

Conversely, a “disqualifying disposition” happens if shares are sold before meeting either the two-year offering date or the one-year purchase date holding periods. In this case, the discount, or a portion of it, is still treated as ordinary income and is typically reported on the employee’s W-2 form. Any remaining gain or loss on the sale beyond the ordinary income portion is then treated as a capital gain or loss, which can be short-term or long-term depending on how long the shares were held after purchase.

Companies are required to report ESPP transactions to both the employee and the Internal Revenue Service (IRS). Employees typically receive Form 3922, “Transfer of Stock Acquired Through an Employee Stock Purchase Plan,” which reports the details of the stock purchase. For the sale of shares, Form 1099-B, “Proceeds From Broker and Barter Exchange Transactions,” will be issued by the brokerage, detailing the sale proceeds and cost basis.

Accessing Company Specific Information

While general rules apply to Employee Stock Purchase Plans, the precise details of an individual’s ESPP are governed by their specific company’s plan documents. To understand what happens to contributions and shares upon leaving, employees should consult the Summary Plan Description (SPD) or the complete ESPP Plan Document. These documents contain information regarding eligibility, purchase periods, discount rates, and the rules for termination of employment.

These documents are typically accessible through the company’s internal intranet, the Human Resources (HR) portal, or the website of the designated benefits provider or plan administrator. Many companies partner with major brokerage firms to manage their ESPP, and these firms provide online access to account details and plan rules. If an employee cannot locate these documents, or if they have specific questions that are not clearly answered, they should contact their company’s HR department or the plan administrator directly.

It is recommended to review these documents and clarify any uncertainties with the appropriate parties before leaving the company, if possible. Understanding all implications and deadlines in advance can help prevent unexpected financial outcomes. Proactive review ensures informed decisions about ESPP assets and a smoother financial transition.