What Happens To My ESPP When I Quit My Job?
By Cecil Staton, CFP®
What Happens to My ESPP if I Quit My Job?
Employee Stock Purchase Plans (ESPPs) can be a fantastic part of your equity compensation package, offering a great opportunity to buy shares of your company’s stock at a discounted price. But what happens to your ESPP if you leave your job? Whether you’re transitioning to a new employer or dealing with unexpected job loss, understanding your ESPP plan rules, tax implications, and financial planning opportunities can help you make informed decisions.
In this article, we’ll explore the specifics of ESPPs and how they’re affected by a job change. We’ll also look at how a financial advisor can help you navigate these complexities and align your ESPP benefits with your financial goals.
Understanding the Basics of an Employee Stock Purchase Plan (ESPP)
An ESPP allows employees to purchase shares of company stock, often at a discounted price, through payroll deductions over a specific period. The purchase typically happens at the end of the purchase period, which is part of a larger offering period. Some ESPPs also include a lookback provision, allowing you to buy shares at the market price at the start of the offering period or the purchase date—whichever is lower.
Key terms to know:
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Offering Date: The start of the offering period.
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Purchase Date: The end of the purchase period when shares are bought.
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Discounted Price: The price you pay for the shares, often 85% of the lower market price.
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Lookback Provision: A feature that maximizes your discount based on price trends.
What Happens to Your ESPP When You Leave Your Job?
The fate of your ESPP depends on several factors, including whether you’ve already purchased shares, your plan’s specific rules, and the timing of your departure.
Purchased Shares
Once you’ve purchased ESPP shares, they’re yours to keep, even if you leave your job. These shares are not subject to a vesting period like other equity awards, such as restricted stock units (RSUs). However, what you choose to do with those shares—hold, sell, or transfer—can have tax implications.
Unused Contributions
If you leave your job before the end of a purchase period, unused ESPP contributions are typically refunded to you through payroll. Unfortunately, you won’t have the opportunity to use those funds to purchase shares unless your company’s ESPP has unique provisions allowing post-termination purchases (a rare benefit).
Plan Rules
Each company’s ESPP has specific rules that govern what happens when an employee leaves. Reviewing your stock plan documents and consulting your HR department can clarify how your ESPP account will be handled. Some plans terminate your participation immediately, while others may offer a reasonable period to finalize transactions.
What Happens if You Quit Midway Through the Purchase Period?
If you decide to quit midway through your ESPP’s purchase period, the outcome largely depends on your company’s specific rules. Generally, companies handle mid-period departures in one of two ways:
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Immediate Disenrollment: Most companies automatically disenroll participants who leave before the purchase period ends. In this case, any contributions withheld from your paycheck are refunded to you without interest. While this means you won’t lose your money, you’ll also miss out on the opportunity to purchase company stock at the discounted price.
For instance, imagine your company’s ESPP offers a 15% discount and a lookback provision. If you’ve been contributing during a rising market, holding off on quitting until the purchase date could allow you to lock in shares at a significantly lower price compared to the current stock price.
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Limited Post-Termination Participation: In rare cases, some companies allow former employees to complete their ESPP purchase for the current period, using the funds already contributed. However, no further payroll deductions are permitted, and you cannot enroll in future offering periods. While uncommon, this benefit can provide a valuable opportunity to take advantage of your contributions and the ESPP’s discounted price.
Deciding whether to quit midway through a purchase period should involve careful consideration of these factors. If your contributions align with a potential lower purchase price due to the lookback provision, delaying your departure until the purchase date might yield greater financial benefits.
Tax Implications of Quitting with an ESPP
Tax laws play a significant role in how ESPP shares are treated when you leave your job. Whether you’ve held the shares long enough for favorable tax treatment or are selling them early, it’s essential to understand the tax implications.
Qualifying vs. Disqualifying Dispositions
To qualify for favorable tax treatment, ESPP shares must be held for at least one year after the purchase date and two years after the offering date. This is known as a qualifying disposition. If you sell the shares before meeting these criteria, it’s considered a disqualifying disposition, and part of your gain will be taxed as ordinary income.
Ordinary Income Tax Rates and Long-Term Capital Gains
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Ordinary Income Tax: In a disqualifying disposition, the discount you received at the time of purchase is taxed as ordinary income.
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Long-Term Capital Gain: In a qualifying disposition, any gain above the purchase price is taxed at lower long-term capital gains rates.
Reporting ESPP Sales for Tax Purposes
The IRS requires you to report ESPP sales on your tax return, and you’ll need to reference Form 3922 provided by your employer. This form details the fair market value of the stock at the time of purchase, the purchase price, and the discount received.
Financial Planning Opportunities
Leaving your job is an excellent time to reassess your financial goals and how your ESPP fits into your broader investment strategy. Here are some key areas where a financial advisor can provide value:
Diversification
If a significant portion of your portfolio consists of company shares, you may be overexposed to a single stock. A financial advisor can help you diversify to reduce risk while still benefiting from your equity compensation.
Tax Planning
Selling ESPP shares requires careful planning to minimize tax liability. A financial planner can analyze your holding periods, calculate potential tax impacts, and develop strategies for qualifying dispositions.
Investment Strategy
Your ESPP shares should align with your overall financial goals, whether that’s saving for retirement, buying a home, or funding a child’s education. An advisor can create a tailored investment plan that incorporates your ESPP benefits.
Common Questions About ESPPs and Job Changes
Can I Keep My ESPP Shares After Leaving?
Yes, purchased shares remain yours. However, any pre-termination payroll deductions that haven’t been used to purchase shares will be refunded.
What Happens to My Contributions?
Unused contributions are typically returned to you after your termination date.
Do ESPPs Have a Post-Termination Exercise Period?
Unlike stock options, ESPPs generally do not have a post-termination exercise period. Any shares purchased are already yours, and unused funds are refunded.
How Do I Handle Taxes on ESPP Shares After Leaving?
Consulting a financial advisor or tax professional is essential to ensure compliance with tax laws and optimize your strategy.
Legal Advice vs. Financial Advice
While this article provides informational purposes, it’s crucial to seek professional legal advice for specific rules in your ESPP plan and professional financial advice for aligning your ESPP benefits with your financial goals.
The Role of a Financial Advisor
Navigating the complexities of ESPPs, especially during a job transition, is challenging. Here’s how a financial advisor can help:
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Understanding Plan Rules: Advisors can explain your ESPP’s specific details, including lookback provisions, waiting periods, and tax implications.
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Optimizing Tax Outcomes: By timing share sales strategically, you can reduce your tax liability and maximize your ESPP benefit.
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Integrating ESPPs into Your Financial Plan: A financial planner ensures your ESPP aligns with long-term goals and investment strategies.
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Providing Investment Advice: From diversifying your portfolio to determining whether to hold or sell shares, advisors offer tailored recommendations.
Final Thoughts
Employee Stock Purchase Plans offer a great opportunity to build wealth, but understanding what happens to your ESPP when you leave your job is critical to maximizing its benefits. By reviewing your plan rules, considering the tax implications, and consulting a financial advisor, you can turn your ESPP into a valuable part of your financial strategy—even after leaving your current employer.
Ready to explore how your ESPP fits into your financial future? Schedule a consultation with a financial advisor to discuss your goals and next steps.
Author: Cecil Staton, CFP® CSLP®
I'm a fee-only financial advisor for dentists serving clients nationwide.
I left the large financial institutions to start my own RIA. I did it so people could pay for real planning and not just an agenda to sell a hidden product. As a fiduciary, Arch Financial Planning, LLC was built on that promise by delivering non-cookie-cutter plans that provide solutions to achieve their goals.
Who do I serve?
Typical: Dental practice owners
Goals: Pay off student debt, start/sell a practice, and grow their wealth
Location: Virtually anywhere in the U.S.
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