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Employers sweeten stock plans

By Jennie L. Phipps · Bankrate.com
Sunday, April 14, 2013
Posted: 7 am ET

Companies are enhancing their employee stock purchase plans after pulling back following the 2008 market meltdown, according to Fidelity Investments, which administers about 250 plans nationwide.

More than half of the companies Fidelity surveyed plan to sweeten the deal for employee purchasers in the next year by either increasing the discount rate or adding a look-back period. Generally, the employee discount is somewhere between 5 percent and the IRS-approved maximum of 15 percent. A look-back period -- usually a year -- lets an employee choose to purchase the stock at its lowest price in that designated time period. Many companies offer one or the other.

In general, participants purchase the stock by payroll deduction -- money on which they've already paid taxes. When they sell the stock, any profits are taxed at either the long-term or the short-term capital gains rate -- depending on how long the employee has held the stock. There are usually no restrictions on when an employee can sell -- unless the Securities and Exchange Commission considers the employee an "insider." Most employees aren't in that category.

Participating in an employee stock purchase plan can be a very good retirement planning tool. For example, in its recent annual report, Fairfax Financial, an insurance company, reported that an employee earning about $40,000 annually who had participated fully in its employee stock purchase plan since the company was founded 27 years ago would have accumulated 3,068 shares of stock worth $1.1 million at the end of 2012. Not a bad deal.

Of course, every stock purchase plan doesn't have such positive results. Joan Bloom, senior vice president in Fidelity's stock plan services group, suggests that employees who participate in stock purchase plans sell some of it over time to balance and diversify their holdings. Owning too much company stock can put you in a terrible position if the company does poorly. You could lose both your job and watch your stock and your retirement fund become worthless.

But overall, Bloom thinks the option to participate in an employee stock purchase plan is a plus. "It is a great benefit, and people should be seriously considering participating if a plan is offered," she says.

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